This guest post is by Alexandra Carroll, Director of Summus, a market research firm specializing in strategic insight.
The Wall Street Journal raised some interesting questions with its article “Big Brands Like Facebook, But They Don’t Like to Pay.” While 96 of the top 100 U.S. advertisers bought Facebook ads in the past year, the majority of Facebook’s advertising revenue comes from small, local companies, the article notes. I’ve been thinking about how Facebook has landed in this position, and I have a hypothesis.
Smaller, less well-known companies can rely on the targeted nature of Facebook ads to reach new and repeat customers in their specific demographic. On the other hand, the largest, most well-known brands might not necessarily see the upside of the small, marketplace ads that run on the social network. Most of them have not yet harnessed the power of the highly targeted niche advertising Facebook allows.
Another challenge for Facebook is that large brands are becoming more likely to have dedicated social media staffers at work building a robust community and creating an engaging social media experience for their fans. Data that Summus collected last year in The State of Social Media for Business shows that 35% of the largest companies (more than 50,000 employees) were “using multiple social media platforms in a coordinated effort” and more than a quarter (27.1%) of these largest companies had “at least 2 employees dedicated full time to social media.” Useful Social Media found that in 2011, 79 of the Fortune 100 are using social media as a major channel for their marketing and communications.
While it would seem like this dedication of human and financial resources would be a positive development for Facebook, it also means that large companies can more easily pull off complex social media campaigns such as the Ford Focus campaign around its spokespuppet “Doug.” The campaign cost Ford many millions of dollars to produce those ads and pull off that viral campaign, according to the WSJ. Unfortunately for Facebook, it didn’t see very much of that investment. The WSJ article explains how once “Doug” got 10,000 likes, Ford pulled the rest of its advertising and let the power of the network take over. Ford says Facebook only saw 5% of Ford’s total online ad budget for the Focus campaign.
If companies can inspire true engagement on social media networks by spending very little in traditional ad dollars, how does Facebook ever hope to grow its ad revenue? Many of the options Facebook has would seem to run counter to principles Mark Zuckerberg has stood by for seven years. Larger ads or branded environments, where a company could “sponsor” an individual’s Facebook page, could certainly irritate already frustrated users. Facebook could go the way of other “free” networks like Craigslist and start charging companies to use the site. Craigslist is free to users (and ad-free, I might add) with the exception of job postings that companies must pay for. Facebook could start charging companies to maintain corporate sites or to post certain types of content, like videos or surveys. But I wonder if such a policy would, in turn, hurt ad sales. Facebook seems to be maintaining a carefully calibrated balance between the needs of users, companies and its own bottom line.
Of course, advertising is not the only revenue stream open to Facebook. The true wealth of the network likely lies in the value of all these interconnected social ties — what Facebook calls the social graph. Facebook is not just another website with millions of users. The level of personal engagement and the power of the social graph is unprecedented and opens up a number of revenue possibilities.
If Facebook chooses to go the way of other social revenue models, it could compete with online marketplaces (such as eBay) using its credits system. It could also make companies pay for recruitment services (a la LinkedIn), enterprise services (a la Twitter’s paid tweets), or even a Facebook app store where some programs were free and some weren’t (a la Apple).
Facebook also stands to drive significant revenue through partnerships with developers using its API. Large companies are already leveraging the social graph to create innovative user experiences that have immeasurable marketing power. Toyota recently launched their Facebook app, called Social Media Racer, an innovative take on a racing game that turns the user’s Facebook page into the racetrack. Toyota could never have created this experience without access to the social graph. If Facebook can find a way to monetize these developments, the upside is huge.
Of course, what Facebook has right now is millions of engaged users and the natural corollary is good ol’ fashioned targeted advertising. “Advertising dollars follow eyeballs, and both the number of users and time they’re spending on Facebook has and continues to go nowhere but up. With consumers actively engaging directly with brands alongside their friends and family — and the opportunity to measure those interactions — Facebook is arguably the most transformational media platform of our time,” explained Ric Calvillo, CEO of Nanigans, a fully automated Facebook advertising solution built specifically for large-scale advertisers.
Companies are learning to love social media because it allows them to connect with their customers in new and sometimes innovative and exciting ways. But what’s good for companies isn’t necessarily good for the social networks themselves. The free and open nature of the networks means looking outside the language of traditional online advertising to find new and innovative revenue streams. Social advertising is in its nascent stages; with it Facebook has the opportunity to create a multi-billion dollar ad space. It just has to figure out how to lure the big fish.