Facebook Analysts Agree to Disagree on Effectiveness of Its Ads

Online Advertising

Photograph by Robyn Back/AFP via Getty Images

will give investors their quarterly peek into its financial performance on Wednesday afternoon, a chance for the public to see how well the company is using its enormous user base to serve advertisers. At least one observer has already concluded that the effort so far has been a major failure.

A report released this week surveyed 395 marketers about what kind of online advertising they find most effective. They generally expressed skepticism about social media websites in general, ranking Facebook at the very bottom of the list. Respondents named and Twitter more effective than the world's biggest social network.

This should come as a surprise, given Facebook's combination of enormous reach and relatively inexpensive advertising rates, according to Nate Elliott, the report's author. 'When you look at the data,' he says of Facebook, 'this is a company that should be winning.'

Elliott argues that Facebook isn't taking advantage of its assets. For instance, the company touts the value of the social graph, an in-depth look at its users' social connections. But social data was used to target audiences in only 15 percent of Facebook advertising. Elliott says this number was provided by marketers and confirmed by Facebook; the company didn't respond to requests for comment from Bloomberg Businessweek.

The idea that ads on Facebook aren't as valuable to marketers as, say, ads on is nothing new. The disparity is reflected in the relatively low rates that the giant social network charges advertisers. Forrester's report has drawn some skeptical response because it was based a relatively small sample of people discussing how they feel about Facebook, rather than from data showing actual activity on the site. The suggestion that Facebook is underutilizing its social data has likewise been met with some shrugs. 'If Facebook is at 15 percent today, where were they a year ago?' says an analyst at one investment firm. 'Either they're rolling it out slowly or they're just not flooding the system.'

Digital Index released its own report this week that draws essentially the opposite conclusion from Forrester. Analyzing data from traffic on social sites, it found that people are clicking on more Facebook ads and advertisers are seeing 58 percent higher returns on investment than they were a year ago. As a result, Facebook is able to charge 120 percent more on a cost-per thousand basis-the rate sites charge for 1,000 views of an advertisement. The social network is finally starting to see the payoff from its investment in ad platforms over the last several months, said Tamar Gaffney, the index's principal analyst.

That doesn't mean Facebook lacks challenges. One is coming up with ways to get enough ads on the site to meet advertiser demand without alienating users. Adobe found that Facebook has increased the number of ads by 85 percent over the last year. 'It doesn't feel that way because the advertising is better targeted,' says Gaffney.

Meanwhile, competition is coming. Twitter has been ramping up its advertising operation with a bevy of acquisitions before it goes public later this year. And while Pinterest isn't selling advertisements yet, the company is beginning to figure out how it wants to do so. Marketers are licking their chops.

It's hard to directly compare these sites now because Facebook's advertising operations are much further along. Adobe looked at the amount of traffic that various social sites sent to retail websites, a likely indicator of which social sites retailers will find valuable. Facebook still drives about 57 percent of that traffic. A year ago it accounted for 77 percent. Pinterest and Twitter have gained the most ground.

If advertisers really are unhappy with what Facebook has to offer, they'll soon have more options.

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