Advice

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Opinions - Unliked. Is the sheen coming off Facebook?

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by Magnus Shaw

 

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When discussing Facebook, different rules apply. In Facebook's world, audiences, members, revenues and profits are measured on a macro-scale that dwarfs the figures bandied around in banking circles. A few statistics:

 

 

-Users upload more than 250 million photos to the site each day.

-The site stores upwards of 100 petabytes of data - double all the written works of humankind.

-In 2011 the company made $1 billion dollars profit from a revenue of $3.7 billion.

-Mark Zuckerberg's 28 percent share in the company makes him worth more than $29 billion.


So really, in the middle of a global recession, this social network exists in a different universe from humble mortals. And yet, when a company towers at such a breathtaking height, any wobble in its foundations is cause for serious concern - and there are undeniable and significant wobbles.

You may be aware that Facebook floated as a public company earlier this year. This is what made Zuckerberg so rich he could throw away his hoodie and pop on a brand new one every half an hour (as well as spending three quarters of a million dollars on private jets this year). On floatation, a single share in the company would have cost you $42.00. When you consider many company shares are available for less than five dollars, you begin to see how tasty Facebook looked on day one. However, yesterday a share was just $28.09 - and at one point $27.45. This doesn't happen unless investors suspect something is amiss. So what could be going wrong?

First, Facebook's extraordinary value is largely based on its user numbers. Current estimates put that figure at around 835,525,300. Yes, that's an awfully big user base - but it's shrinking. The last six months saw a drop of 1.1%. Not a catastrophe, but definitely a movement in the wrong direction. Which is something those accursed markets really hate. In the financial jargon, they are "spooked". What's more, the first half of 2012 witnessed a significant contraction in use of the site. In the USA, 4.8% fewer visits were made to Facebook, year on year. In site traffic terms that's quite a dip.

Then there's advertising. You may have noticed it costs nothing to join and use the Facebook service. As a wise person once said "If you're part of a free network with almost a billion members, you're not the customer, you're the product." The site's revenues depend on advertising, not subscriptions. Now obviously, advertisers have been very keen to leap aboard the social bandwagon and expose themselves to two billion hungry eyes, but now confidence in the Facebook advertising model is slipping.

Online advertising is all about click-through-rates (CTR). That is, the number of people viewing the ad versus the number who click on it. The average CTR for an ad on a popular blog is 0.165%. The average for Facebook ads (entertainment brands) is just 0.154%. This too is a fall on previous performance. Not only that, but the cost of those clicks is increasing at the same time as the likelihood of the user clicking decreases.

The price of a click on a Facebook ad averaged 17 cents 2009. It was up to 25 cents in 2010. Of course, not every click results in a sale (or even a "like") and it has been calculated that it can now cost a brand $3.60 to obtain a single Facebook friend.

Apologies, if many of these figures are American. This is simply because the US is Facebook's primary market - as long as the site is thriving there, everything else is window dressing. So the question has to be - is Facebook advertising still thriving and delivering for its advertisers? One key client has decided it isn't.

Just as Facebook was readying itself for that public stock sale, the effectiveness of its advertising model came under scrutiny, as automotive giant General Motors decided to pull its paid ads. Although GM has suffered heavily in the fiscal crisis, it still wields massive marketing budgets and solid influence. Withdrawing their campaigns from Zuckerberg's site would have caused nothing much more than a minimal blip on Facebook's profit sheets. But the loss of such a high-profile client sends could be far more damaging in terms of reputation. How many businesses are now thinking "If it's not good enough for GM, it's not good enough for us?"

Please don't misunderstand me. Facebook is still the internet business that conquered the world. It snaps up competitors before breakfast and major players continue to view the site and Mark Zuckerberg with envy and awe. Nevertheless, if the planet's best known social platform was once a soaring rocket, it is now slowly but steadily, slipping back to earth. There's every chance Facebook has a large booster engine about to fire up. Then again, weren't we all quite taken with MySpace and Friends Re-United just a few short years ago?

Magnus Shaw is a copywriter, blogger and consultant.

Visit Magnus Shaw's website
www.creativepool.co.uk/magnusshaw
"ADVICE" a collection of Magnus Shaw's columns is now available as a Kindle book.
 

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