Is Facebook's Opposition to Privacy Laws Driven By Fear of Its Weak Advertising Sell-Through?

Financial historians beware. LinkedIn's ballistic IPO may have had the same impact on social media monetization that private equity billionaire Steve Schwartzman's 2007 60th birthday party had on the global financial markets.

You may recall that Schwartzman, the very successful New York financial mogul, threw himself a lavish birthday party to celebrate, well, himself. OK so far: he is not exactly the first person to pound his own chest since hominids climbed down from the trees and started trekking out of Africa. The problem was that his party marked a market top of sorts, the end of the Clinton-Bush-era financial excesses that led, a few months later, to the financial crisis and Great Recession.

LinkedIn's IPO, which analysts are crawling over like ants on spilled soda, has raised more questions than it has spawned glorious visions of a magnificent future. The commentary is running heavily in the 'how can anyone justify this?' vein. Which leads us to Facebook.

Facebook's ad sales numbers have been impressive, according to its own releases. Since it is not a public company it is not required to disclose results. The concerns that are arising are about how effective Facebook is in what is called click-through, which means the percentage of people who go from clicking on something that interests them to actually making a purchase. There is some evidence to suggest that the 'like,' and 'fan,' and 'friend' tabs are not leading to sales.

Enhanced privacy laws would further erode Facebook's position because right now, they are the China of the internet: the sheer size of their membership has marketers and investors drooling at the potential for sales. If people with privacy rights start opting out, Facebook's potential sales power is diminished. There is no evidence that people will use that opt-out power because research suggests they value convenience more, but this will be an important set of developments to watch.

Jim Edwards reports in BNet:

"Facebook’s opposition to proposed privacy laws (in California and in Congress) and the ending of many of its restrictions on advertising and promotions are starting to make the social network look desperate. Why is Facebook so keen to lower its standards, to the extent of selling children’s data to advertisers without their permission?

My colleague Erik Sherman says it’s simply because Facebook is desperate for money. Well, sure, but why would the web site that delivers 31.2 percent of all internet ad impressions — there were 1.1 trillion of them in Q1 2011 — be so needy?

Again, it comes down to the mystery surrounding the effectiveness of ads on Facebook. There is very little public data on what works on Facebook and what does not. Most companies take advantage of Facebook’s free offerings — a fan page where your brand can gather “likes” and so on — but those functions cost Facebook unless the advertiser goes a step further and actually starts buying inventory
“Unremarkable” ad performance

Nielsen published a study last year of 800,000 Facebook users’ responses to more than 125 Facebook ad campaigns from 70 brands, and found that “purchase intent” among those who saw the campaigns only increased 2-8 percent, even when the ad unit featured a message endorsed by your friends, such as “Bob Smith and Jen Jones are fans of Virgin America.” Here’s how those results were received in the ad business:

Rex Briggs, CEO of the analytics firm Marketing Evolution, which has conducted numerous online advertising effectiveness studies, called results for Facebook’s regular home-page ads “unremarkable and in line with banner ads [generally],” …

No better than banner ads? The ad biz has been searching for something better than banner ads — which are widely ignored by consumers — since the 1990s.

Jennifer Modarelli, owner of the digital consultancy White Horse, believes that a level of “magical thinking” has arisen among advertisers when it comes to Facebook:

[In a study,] when marketers were asked, “How are you measuring the effectiveness of social media initiatives that you have implemented to date?” 94% of them ranked growth rate in number of followers as the top metric. And yet when asked about the key benefits of Facebook, only 16% of those same marketers thought that fans were important. Basically their No. 1 metric is one they don’t care about or believe in. It’s a form of magical thinking: Marketers know fans are not a good metric, but since it’s easy to measure, it must be made meaningful.

To that point, both Ford (F) and Pepsi (PEP) have had difficulty utilizing Facebook for some brands.

Lousy economics

Now look at how advertisers talk about LinkedIn, which has a much more targeted offering:

“In the first place, LinkedIn’s user base is really appealing,” said Ben Grossman, communications strategist at agency Oxford Communications, Lambertville, N.J. “They have a demographic, income level and focus on their professions well above other social networks we could buy. And all LinkedIn profiles are associated with lots of business information, such as companies, contact roles and positions, and geography.”

So lousy are the economics of web advertising that they do not form the majority of revenues at FriendFinder (FFN), LinkedIn (LNKD), or (probably) Twitter. MySpace used to bring in significant ad revenue, but that has fallen off dramatically and News Corp. (NWS) is now trying to sell the business. Pandora has made a go of it, mostly by selling ads between songs, but it has incurred soaring music license costs to do so. Neither Facebook nor Twitter sells ads on their fastest growing platform, mobile.

I’m not saying Facebook can’t sell ads. Clearly it is delivering a huge number of ads, in a variety of forms. It is certainly making huge sums in revenue from advertisers. Nonetheless, Facebook’s sensitivity to the legal and policy environment suggests that its ad business is a fragile beast that Facebook feels is easily threatened.