GM’s Exit May Signal Challenges For Facebook’s Ad Revenue Growth
Facebook seems to have hit yet another hurdle right before its IPO. General Motors (NYSE:GM), which is one of its largest advertising clients, has decided to stop advertising on the social networking giant, stating the its paid ads on Facebook had little impact on its targeted consumers’ purchases. If other advertisers run into this issue as well, it may be a cause for worry as text and display advertising is Facebook’s most profitable and primary business currently. [1]
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Unlike Google’s AdWords system, which has a proven value proposition for advertisers replete with detailed analytics and suggestions to improve their ROI, Facebook’s advertising system is still a work in progress. However, social advertising may become as lucrative a market than search advertising, or even surpass it in terms of the overall global market size in the coming years, if social networking platforms like Facebook and Twitter are able to demonstrate value to advertisers in terms of ROI.
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GM spent nearly $10 million on Facebook advertising last year, which is just a drop in the bucket compared to its overall ad revenues. While GM’s departure won’t hurt Facebook much if this move signals the beginning of a trend which will see many more advertisers leaving Facebook, it could lead to a significant decline in Facebook’s ad revenue growth, which has already slowed down considerably following a hockey-stick growth trajectory.
GM will continue to maintain its pages and online presence on Facebook, but that won’t earn Facebook any revenue. Facebook offers brands a chance to increase the reach of their fan pages through advertising, increasing engagement on its platform. While Facebook does offer the highest engagement levels compared to any other online property, whether or not that engagement converts into a significant amount of sales to justify increased ad spending by brands on its platform is yet to be seen.
Facebook is the largest social network in the world with more than 900 million monthly active users. It competes primarily with much smaller competitors like Google+, Twitter, LinkedIn (NYSE:LNKD) and Pinterest in the social networking space, and withGoogle(NASDAQ:GOOG), Microsoft (NASDAQ:MSFT) and Yahoo (NASDAQ:YHOO) for online advertising dollars.
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