Why You Should Buy Facebook (And Sell GM)

There's a battle brewing between the old-world thinking of Madison Avenue and Wall Street and the mindset of the Facebook generation. GM's $10 million ad-pull was just the first skirmish.

Good news for beleaguered Facebook fans: All the weeping and teeth-gnashing about the "failure" of the world's biggest personal publishing and content-sharing platform represents a complete failure to understand where Facebook's real economic value lies.

The tear-streaked, angry red faces, of course, belong to Madison Avenue and Wall Street, institutions famous for opposing any threat to their power and their ancient ways of operating.

General Motors, most traditional of the giant traditional advertisers, set off the mass chanting of "ad revenue, ad revenue" when it pulled its $10 million ad buy from Facebook days before the IPO. But Facebook's current and potential value has far more to do with connections, e-commerce, and data than with the ad industry's anachronistic appetite for paying to stick traditional digital ads and banners on the site.

Facebook is about replacing traditional ads with shared content; it's about new ways of sharing with friends and strangers, not old, failing ways of shilling for products. Facebook, in other words, is not friends with the Madison Avenue establishment.

The commercial importance of Facebook and content sharing was underscored recently when market research firm Nielsen updated its long-term survey on which media forms are most trusted and most affect people's decisions, especially buying decisions. Confirming previous findings from 2007 and 2009, Nielsen's 2012 report declares the recommendations of friends are still the leading purchase influencer, followed by the recommendations of strangers online. The new information from Nielsen is that the trustworthiness and influence of traditional media and ads have suffered a steep drop since 2009.

The Nielsen Global Online Consumer Survey 2012 involved roughly 25,000 people in about 50 countries around the world. (You can download the complete Nielsen report if you give them contact information.) Take a look at the chart my agency produced comparing Nielsen's 2009 and 2012 results. As anyone can see, public trust in traditional ads and media plummeted by about 29% on average. For TV and newspapers, the drop was a steeper one-third. Considering all traditional advertising and brand messaging, less than half the online audience reported trusting these media or being influenced by them.

What I call "traditional" digital advertising--banners, online video ads, display ads on Facebook--perform even more dismally. Traditional ads perform even worse online than on TV or paper, apparently.

But 92% of all people told Nielsen they trusted and were influenced by friends online and 70% feel the same way about strangers' opinions online.

These numbers mean, at a minimum, that Chief Marketing Officers of the world's Big Brands have stopped (or should stop) dreaming about recruiting new consumers with expensive TV spots or magazine spreads. Instead, they should be dreaming that a friend or a stranger shares an online link to a piece of content authored by their brands.

This is the advertising world's new dream because Nielsen's numbers and a lot of other research indicate that such social sharing of brand content is, by a 2-to-1 factor or better, the most effective way to generate purchases. So brands don't really want to deliver messages directly to audiences anymore; brands prefer that friends deliver the brands' messages to friends and strangers online. Even Coca-Cola, sophisticated but very conservative and traditional, leapt on the "contagious content" bandwagon early this year, vowing to shift its advertising strategy to content their consumers will share.

Other research and simple arithmetic (900+ million users) show all this content sharing is most likely to happen on Facebook. Given the arithmetic, this will continue to be true for the foreseeable future.

Facebook will flourish, in other words, because it is the place where nearly a billion people currently share content that causes others to buy things. This is why Facebook is becoming a center of social commerce. This is why its value will grow exponentially based on its growing share of e-payments and the ad industry's growing reliance on the consumer data it houses.

It doesn't take a genius to figure out how Mark Zuckerberg and his shareholders will make money on this exploding phenomenon.

The Great Facebook Panic began a month ago when General Motors rattled the markets by announcing that "paid ads on the site have little impact on consumers' car purchases," as The Wall Street Journal reported. GM added, however, that it was going to continue spending about $30 million a year creating content for its various Facebook fan pages because it believes, as CMO Joel Ewanick told Forbes, that Facebook is a good place "for engaging with our customers."

This prompted me to tweet that GM was "clueless" about the purpose of Facebook and Facebook advertising. Without belaboring the arcane details of social media engagement, the primary reason to buy an ad on Facebook is to drive your audience to engaging, contagious content you have posted there. Posting great content and not advertising it is a missed opportunity. Conversely, advertising while posting boring content or not posting frequently enough is an equal waste of money and time.

GM's Facebook ads "didn't work" because their content is bland, random and not very compelling or shareable. Comparing the metrics of various carmakers' Facebook pages, GM ranks near the bottom with roughly 1% of its "fans" having liked, shared, or commented in the past seven days. Brand pages in general have a 5% average for such fan engagement.

GM isn't alone in failing to understand how Facebook or shared content really works. The financial press and Wall Street's analysts also have proven pretty clueless about the engines that will drive Facebook's value. (The shining exception is thestreet.com and Needham analyst Laura Martin. Everyone thinking about these issues should read Martin's take.)

But the rejection of Facebook's IPO has been largely based on the advertising and finance establishments' futile attempts to preserve the past, not on Facebook's inability to grasp the future.

Still in the mood to sell some stock? Thinking about Facebook might spur you to sell your shares of GM.

[Full disclosure: My wife and I jointly own 300 shares of Facebook. We got 200 shares at the IPO price of $38 because we have an account with Morgan Stanley. The other 100 we just bought at $26.]

Kirk Cheyfitz is a writer and CEO/chief editorial officer of Story Worldwide, a full-service, global ad agency focused on content, strategy, digital, and social.

[Top image: Flickr user fauxto_digit]

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12 Comments

  • benjamin abramowitz

    I think the author is missing a major point. The difference context and intent. And how context will always lose to intent. GM's ads on Facebook were crap, because they were crap. They were ineffective, because it is ludicrous to think that a) consumers come to Facebook looking for info about cars b) make a purchase as big as a vehicle because of a friend endorsement. 

    No one goes to Facebook specifically to buy anything. Or to learn about something. Or to hear about a product. My newsfeed is a newsticker of stuff my friends are doing. Brands are trying to get into it. 
    It may work. It is not going to generate a load of cash. 

    I was surprised the author didn't mention the new Facebook program to limit posts from brand pages to 12.5% fan penetration. Pay more money, for your message to be seen by more. Still a bit archaic, but getting better. 

    How about an ecommerce environment that allows brands sell small amounts of product on Facebook. Every person with taste and a laptop now has a blog with curated fashion items and the chance to click through to purchase. Fashion is a category majorly influenced by friends decisions and support. 

    What about opening up the API, and defining consistent parameters, so advertisers are more open to developing stable platforms? How about 

    There is an inherent problem with making advertising visible on Facebook, when it has been persona non grata for so long. 

    I think there are loads of ways for FB to raise value, and generate revenue. Better banner ads are not one of those ways. 

    The author would do well to remember that everyone who goes to Google.com, goes with intent and a specific purpose. Right now Facebook lacks a purpose in consumer's lives that advertisers understand how to monetize. Or the true value of monetizing. 

  • atimoshenko

    The effectiveness of a message today is inversely proportional to the size of the financial motivation behind spreading it. People trust recommendations, in other words, because recommenders are not recommending for monetary gain. On a side note, most acts of recommending are preaching to the choir – reinforcing the idea, among friends, that "I also like what you like", and in any instance that is not true, recommendations are only really useful for things about which the 'recommendee' has not yet formed an opinion ("check out this new band") as opposed to being able to modify already established preferences ("Apple iPhone is better than Samsung Galaxy").

    GM and the author of this article actually seem to be in agreement. Traditional advertising – of the kind that Facebook actually charges for – does not particularly work any more. In a world overflowing with information (meaning that if a product is good people WILL hear about it – just look at how Google, Facebook, Twitter, Instagram, etc. all grew without advertising), the scope for marketing is shrinking to PR pushes surrounding the launches of new products or promotions and periodic entertaining statements of 'brand pride'. So what is a company like Facebook to do? Start charging brands for hosting their brand pages? Charge brands every time something of theirs (whether on or off Facebook) is 'liked'? That's obviously worth SOME money, but I struggle to see it becoming hugely lucrative.

  • Kirk Cheyfitz

    Here's where GM and I part company: Display ads on Facebook work, they just don't work the way GM's Ewanick seems to want them to work. GM wants a world where someone sees an ad, goes to a dealer and buys a car. That world is pretty much gone. On Facebook (and elsewhere on the web in general), ads work best when they point people to content that provides a valued experience; not when they point to products. As I say in the piece, "the primary reason to buy an ad on Facebook is to drive your audience to engaging, contagious content you have posted there." The contagious content should be a valued experience that represents one more step toward a purchase or re-purchase decision, as well as an opportunity for the brand's supporters to share the content. So display ads on Facebook are very important, but primarily to build the audience for your content.

  • benard

    Bryan Nagy has a much better point than Kirk. Sorry to say but Cheyfitz's article is poorly researched and is amateurish as best. People love branding on Facebook, which means setting up a fan page to promote causes and events. Banner or web advertising on Facebook has proven to be a poor ROI for advertisers. That said, Facebook is a great place for brands to get a free plug by engaging consumers like they did with an EDM. This also means Facebook isn't getting any advertising revenues from such sources—why should it?...damn web ads don't work. I'm sorry Kirk but your points are way off in rationale and revenue returns for advertisers. 

  • Kirk Cheyfitz

    Benard, thanks for joining in. You remind me a little of me a decade ago when I was complaining that Jeff Bezos was a wacko who would never see a return on the 3 billion bucks ($2.85bn, actually) that Amazon cumulatively lost in its first five years as a public company. Bezos said he was building audience. I couldn't imagine him generating a return on all that sunk cost by selling books. But, despite heavy investments in Kindle and other initiatives, Bezos's operating cash flow for the year ending this past March was--you guessed it--3 billion bucks ($3.05bn, actually) and now he's selling EVERYTHING. You, apparently, can't imagine Zuckerman generating a return by selling display ads. Well, I can't either.  But given an audience of a billion people, I can  imagine several other (better, more profitable) ways of generating revenue than just selling ads. That is essentially all I'm saying. Bryan and I agree wholeheartedly on this point and we both see Facebook's trove of data on those billion people as, using Bryan's word, a real "goldmine" for Facebook. Along with ecommerce and many other things. So I would urge you to rethink how you calculate ROI and how you think about Facebook and the web in general. You may be over simplifying in the same way GM is. A little research will show that the data, including the most recent Comscore study of Facebook, doesn't agree with you.

  • Jim Blasingame

    Mr. Cheyfitz is one of the courageous, early prophets of the
    “post advertising” era. His appraisal in this article of the direction of acquiring
    customers – away from Madison Avenue toward community-building platforms – cannot
    be doubted.   Clearly, the future of marketing looks more
    like Facebook than Madison Avenue: more stories, sharing and referrals (or not)
    by engaged users (the new prospect class), and less puffery and manipulation by
    advertisers. And Facebook, for its part, is to be commended for leading the new
    media revolution.

    New media enterprises have had great success
    helping the rest of us build and leverage community. But up to now, not so much when it comes to creating
    a business model that will endure the arrogance of Wall Street’s fish-eyed
    analysts and fickle fund managers.

    So, Kirk, your appraisal of the future of marketing should
    be accepted as truth by leaders of businesses large and small.  But methinks your stock picking
    needs some work.

  • Jon Thomas

    I think the key distinction here is the purpose of Facebook. People read the statement, "paid ads on the site have little impact on consumers' car purchases," as reported by the Wall Street Journal, and think that GM is making lots of sense. Of course it makes perfect sense. Nobody buys a car on a whim because they saw Facebook ad. They buy a car because it suits their needs and/or the brand has become a part of their life, and maybe it became a part of their life through the car brand's Facebook content. But that's not an excuse to throw the baby out with the bathwater. Leaving Facebook ads behind simply because it's not selling more cars isn't the right way to look at Facebook and how to create content that spreads. Trying to validate a connection between paid ads to car purchase intent is laughable. 

    Paid media, while not the newest tool in a marketer's toolbelt, is still imperative. Brand managers don't have to dedicate as much of their budget on paid as they used to (which is a good thing), but if you create great content, it still "pays" to use paid media to drive initial attention. if the content is great, then consider the paid media just lighter fluid. It will only take that spark to ignite it. 

  • ellen jacob

    Facebook is all about shared content.As always, content needs to be smart, engaging and good.  I've been amazed that GM and Wall Street don't seem to get this. Thanks for making the point.

  • Bryan Nagy

     It's great to see someone who feels the same way I do. I love the stats that you pulled out on GM:

    "Comparing the metrics of various carmakers' Facebook pages, GM ranks
    near the bottom with roughly 1% of its "fans" having liked, shared, or
    commented in the past seven days. Brand pages in general have a 5%
    average for such fan engagement."

    It really is all about creating a conversation with Facebook users to actually see them become brand advocates, and hopefully in the future purchasers of your product.

    I wrote some of my feelings on this issue here:

    http://bryannagy.wordpress.com...