when Facebook issued its stock for sale in an initial public offering on May 18, 2012, it followed a very long build-up of excitement based on the belief that the company, with its then 190 million users in North America and its 1 billion global audience, would turn into a marketing behemoth to rival or exceed Google, Yahoo, and Amazon. Facebook was, according to some analysts, the next Google in terms of an advertising platform and possibly even an e-commerce platform that could compete with Amazon. Facebook raised $16 billion in the IPO, placing it in the “Big League” of e-commerce
stock offerings. Offered at $38 a share, Facebook’s share price fell dramatically in subsequent months
to a low of $17.50 in September 2012 on investor fears that Facebook would be unable to increase
its advertising revenues fast enough to justify its price. Flash forward to August 2013:
Facebook’s shares have doubled, rising back to the offering price. While its shares have
not soared to higher levels as many high-flying start-ups have in the past, and market-
ers are still not certain that Facebook’s marketing machine really works, investors are
willing to continue holding the shares in the hope that social marketing really will work.
For its part, Facebook is furiously inventing new ways to put targeted ads in front of its
increasingly mobile users. It appears to be succeeding, at least for now.
Most observers agree that Facebook initially flubbed the shift to mobile devices—
smartphones and tablets. In 2011, Facebook had virtually no ad revenues from mobile
devices and no mobile strategy. At the time of its botched IPO in 2012, Mark Zuckerberg,
CEO of Facebook, was developing a mobile strategy that essentially depended on inserting
ads into users’ News Feeds. No one knew at that time if it would work. There is no side bar
for ads on smartphones, and limited space on tablets, so the only ad marketing opportunity
appeared to be in the News Feed. Throughout 2012, Facebook took a crash course on
mobile by redesigning its Facebook app specifically for smartphones, introducing ads into
users’ News Feeds, and creating a new kind of ad called an “app-install ad,” which are
ads paid for by Facebook app developers that encourage users to download their apps
(usually for free). App-install ads and in-app ads became Facebook’s secret weapon that
investors had not even heard about. Facebook was aided by a shift away from mobile browsers to apps: in 2013, more than half of mobile users worldwide regularly use brand,
product, or store apps.
Advertisers display ads within these apps, and Facebook shares the ad fees with the
app developers. App-install ads, and ads within apps, are the largest single source of
Facebook mobile ads. There are an estimated 8,000 app developer firms in the United
States alone, and they have created over 25,000 Facebook platform apps. Facebook users
install about 20 million apps every day. These apps range from games like FarmVille,
Words With Friends, and Mafia Wars, to music apps like Spotify and Pandora, to charity-
oriented apps like Social Vibe and Charity Trivia. App ads, and in-app ads, have become
central to Facebook’s mobile strategy. In-app ads have an advantage over standard News
Feed ads: they are not perceived to be as disruptive or annoying as News Feed ads, and
users are more willing to experience the inconvenience of being exposed to ads in return
for a free game.
In the first six months of 2013, 40% of Facebook users accessed the service from
mobile devices (they also used desktop devices at work and home), and mobile ads
generated 41% of Facebook’s $1.6 billion revenue. Now, instead of being behind the
mobile curve, it is at least on the curve, if not ahead of it. Another factor in Facebook’s
turnaround in social mobile marketing is its success with small local businesses. Facebook
has more than 1 million active advertisers in 2013 in part because of its emphasis on
local business advertising.
One such small business firm using Facebook is Pacific Rim, a winery in Portland,
Oregon, that produces affordable Riesling wines. In 2010, Pacific Rim launched a
Facebook page, Pacific Rim Riesling Rules, aimed at building an online community of
Riesling lovers as well as creating a retail point of sale. The page used contests to drive
Likes, videos to engage users, animations to illustrate the wine production process, and
the ability to purchase the wine directly from Pacific Rim. When visitors clicked on a photo of a bottle they were taken to a shopping cart on the company’s Web site. They also
launched seasonal contests, asking visitors to write 150-word essays on why they loved
Riesling. The Facebook community voted on the submissions, and the winner received
$1,000. Pacific Rim gave away $15,000, and generated 15,000 Likes over a 15-week
period. Currently, the winery sells 200,000 cases of wine a year.
But questions still remain about Facebook marketing. The question both investors
and marketers face is straightforward: does Facebook’s social marketing and advertising
platform really work? Does it mean anything if millions of Facebook users Like your
marketing campaign? Do Likes turn into sales? Is Facebook better for marketing (brand
recognition and awareness) than it is for driving sales through advertisements? And, if
Facebook’s marketing platform does work, how well does it work when compared to other
online marketing techniques such as search, e-mail, display ads, and affiliate programs?
Facebook’s marketing success on both the desktop and mobile devices is currently based
on the insertion of ads in users’ News Feeds. Currently an estimated 1 in 20 News Feed
items are ads. When the ads reach 1 in 10 organic News Feed items, how will users
react? How about 1 in 5? Zuckerberg, along with marketers, is concerned that putting
more ads in the News Feed is not the answer to sustaining future growth. Facebook will have to come up with some other ad opportunities especially on the mobile platform. The
most likely candidate: video advertising using short video clips.
Facebook’s purchase of Instagram for $1 billion in April 2012 is another possible
source of ad revenue. Since the purchase, Instagram has added 70 million new users to
its existing 30 million, and today, active users post more than 40 million photos per day.
Once Facebook fully integrates Instagram into user pages, a stream of photos and videos
will appear on the screen, accompanied by ads laced into the stream.
Early market research raised questions about the effectiveness of social networks as
marketing platforms. Research by Goldman Sachs found that social network sites were
not very effective at driving purchases. Less than 5% of online purchasers in the study
ranked social network sites as the most important factor in purchasing. Surveys by market
research firm Compete found that social network sites were the least influential sources
used by consumers prior to purchase, ranging from 2% to 7%. The most influential factors
in purchasing appear to be the retailers’ Web site, search engines, display ads, and e-mail.
To counter this research, Facebook commissioned a study by comScore to demonstrate
the value of marketing on Facebook. Among the findings was the claim that being a fan
of a brand on Facebook leads to more frequent purchases of the brand. The study did not
answer the question of whether other marketing channels had a larger effect on sales
than a Facebook Like.
There are many marketing success stories, from both large Fortune 500 firms and
small start-ups, that lend credibility to Facebook’s claim that its social network market-
ing platform does, in fact, work. Currently, 88% of U.S. companies use Facebook for
marketing purposes.
Despite having the largest online social audience in the world, and its recent success
in mobile display ads, it remains unclear if Facebook can monetize its user base to the
level expected by the stock market and continue growing revenues at double-digit rates
as it has done in the past. It will require several years of experimentation by marketers
and Facebook to discover if social marketing on Facebook really works the way Wall
Street hopes it will.