Brands Love Facebook Fan Pages but Take Their Ad Dollars Elsewhere

Just because a company has a huge fan page on Facebook doesn't mean it spends its ad budget on Facebook. Facebook wants to change that.

Consumer packaged goods companies in particular buy lots of ads elsewhere on the Internet that send viewers to the companies' Facebook pages. ComScore, which studied the behavior of such companies, calls these ads "socially enabled impressions."

Ad Age quotes Mike Zeman, VP for marketing solutions at comScore: "Social destinations are really becoming a focal point in terms of where CPG ads click through to. In many ways the fan page is replacing the brand website as the primary destination for outbound marketing online."

Facebook has now convened a client council consisting of six big brands and as many ad agencies (or their holding groups). Facebook spent the last week in New York selling them on its advertising plans and trying to address their concerns. These include a paucity of ROI metrics and Facebook's tendency to frequently change its product around, sometimes to the chagrin of users and advertising clients.

One example of the shifting Facebook environment for advertisers is the uncertainty over how Facebook's F8 changes will affect the visibility of updates from brands. There is a new "top stories" algorithm. There are tabs that make it easy for users to ask to see more or fewer messages from a brand (or from any Facebook user). There is the ticker, which doesn't include brands' updates but does indicate when friends use a brand's apps.

While Facebook lavishes attention and special programs on its largest advertisers, hoping to become top-of-mind when it comes time to spend the advertising budget, it's worth noting that Google, Yahoo, and Microsoft have convened similar advertising-client councils toward similar ends.

In 2011 Facebook will get 6.4 percent of online ad revenues, versus 40.8 percent for Google, according to eMarketer. Facebook shows more display ads than anybody else, and should end 2011 in the No. 1 spot for display advertising revenue, ahead of Yahoo and Google. Most of Google's revenue comes from search advertising. While Facebook would love to extend its ad business at the expense of Google's search ads, the real prize it has its eye on is the massive budget for TV advertising, estimated at $60 billion.

Facebook is preparing to go public in 2012. So is another of its big sources of revenue: Zynga. This game company got its start on Facebook but now needs to branch out, in order to reassure investors that its revenue stream will not be vulnerable to the whims of Facebook's platform. Zynga is developing its own game site, with social features, that will not depend on the Facebook Credits payment system. Facebook has been taking 30 percent of the revenues when players spend Facebook Credits in-game. While Zynga's move to diversify its revenues (it has also spread to Google+ and to the iPhone) may not detract from the level of gameplay on the Facebook platform, it has to make Facebook just the least bit nervous.

Facebook's pre-IPO valuation stands at a minimum of $65 billion; some estimates put it as high as $100 billion. Values in this range cannot possibly be justified, according to a report from a team of "econophysicists" at the Swiss Federal Institute of Technology in Zurich. The researchers looked at three scenarios for the growth of Facebook's user base. Assuming that the company's historical level of profit per user remains steady, they calculated a valuation of $33 billion for the most extreme growth scenario. A more likely figure would be between $15 billion and $20 billion.

Further, the researchers observed that Facebook's profit per user is not stable, but has been dropping by half every 3.5 years (click-through rates have apparently declined on Facebook more than on the wider Internet). The upshot is that Facebook is going to have to find a way to get 1.5 to 6 times as much revenue per user if its current valuation is to hold. They are working hard at it, but it's a tall order indeed.

What do you think? Is it worthwhile for marketers to spend budgets on Facebook?

— Keith Dawson , Senior Editor, The CMO Site

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