Facebook worth $105bn? Not if you believe the advertisers

Facebook shares

General Motors says Facebook ads are ineffective as survey finds Google adverts are better

LAST UPDATED AT 12:32 ON Wed 16 May 2012

THE MASSIVE $105bn valuation of Facebook has been cast into doubt just days before its flotation on the stock market by suggestions that paid ads on the social network are ineffective.

A new survey suggests that advertising on Facebook is up to eight times less effective than advertising through Google – and the potential damage to Facebook’s balance sheet has been thrown into sharp relief by the separate announcement by General Motors that it will be pulling its paid advertising from the world's biggest social networking site.

The Los Angeles Times reports that GM, which accounts for about one out of every five auto sales in the US, says that it regularly reviews marketing and advertising spending, and that it did not find ads on Facebook effective.

"This happens as a regular course of business and it's not unusual for us to move our spending around various media outlets - especially with the growth of social and digital media outlets," said Tom Henderson, a GM spokesman.

GM spends $40 million annually to maintain a presence on Facebook, with a quarter of that in paid advertising. They will continue to create their own content for Facebook. Industry analysts have recently reported that companies are beginning to re-evaluate social media-based advertising.

"Companies in industries from consumer electronics to financial services tell us they're no longer sure Facebook is the best place to dedicate their social marketing budget - a shocking fact given the site's dominance among users," Melissa Parrish, an analyst with Forrester, wrote on Monday.

The Guardian says GM's withdrawal sends an awkward signal in a week when Facebook has been trying to convince investors that its advertising business underpins the massive valuation the company has received.

Sam Hamadeh, founder and chief executive of PrivCo, a business analysis company, said: "This is an embarrassment for Facebook, no question. They are one of the biggest advertisers in the world. You never want to see something like this come out, especially now."

Business Insider reports that Facebook has less reach, and its individual ads are less effective, than old-fashioned web advertising. More alarming for Facebook is that the average click-through rate for an ad on the internet generally is just 0.1 percent. At Facebook, it's even lower at 0.051 percent.

These figures come from search marketing company WordStream, which says that an advert bought through Google can count on a click through rate of 0.4 per cent - up to eight times more effective than on Facebook.

Larry Kim, founder and chief technology officer of WordStream, is doubtful of Facebook CEO Mark Zuckerberg’s commitment towards improving its ad offering.

"So far, Facebook's advertising platform hasn't kept pace with the explosive growth of its social network, and it remains to be seen if Zuckerberg even wants to focus on advertising as a source of revenue,” he said. “In his 2,500-plus word letter to shareholders this month, he mentioned advertising just once.” · 

For further concise, balanced comment and analysis on the week's news, try The Week magazine. Subscribe today and get 6 issues completely free.