What is the real value of Facebook’s advertising business?
One thing is for sure: Wall Street has no idea. And neither do Facebook advertisers. And therein lies the huge unspoken caveat to Facebook’s $86+ billion IPO.
Ten years ago Google changed the advertising industry forever by giving advertisers the ability to “pay per click” for key search terms and display their ads next to search results. Combined with products like Google Analytics, Google Adwords brought the then fuzzy calculus of advertising ROI into focus. With Google, advertisers not only knew how many people had clicked on an ad, they could also track that person back to their web site, watch them visit a product page, a pricing page and click the purchase button.
With Facebook, the fuzziness is back. Do you know the dollar value of a “like,” “a commment,” or “a share?” That’s the $100 billion question.
“Advertising is not always easy to measure. Facebook does not have a monopoly on this fact,” Michael Lazerow, CEO of Buddy Media states in a Fast Company article titled “The Truth About Facebook Advertising.”According to a study by eMarketer, for 47 percent of people, there’s no value in a like, while 41 percent said they were somewhat more likely to purchase and 13 percent said they were much more likely to purchase. There aren’t numbers you can take to the bank, though you can’t blame Facebook for trying.
Lazerow’s company helps “advertisers succeed on Facebook and other major social networks” and claims to have developed a way of measuring social KPIs, or key performance indicators. According to Lazerow, data from his clients show that “every share on Facebook generates an average of $2.10 in incremental sales.”
Really? It’s hard enough to get exact numbers on conventional key word campaigns that are aimed at driving the purchase of specific products, since other factors can contribute to a boost in sales. And Facebook shares aren’t necessarily product focused. Indeed, because content on a company’s Facebook page strives to be “engaging” it’s often not about products at all. At best, shares of these posts help create a warm and fuzzy feeling about a company that, at some point in the future, might turn into a sale. (There’s that word again.)
From this perspective, a Facebook share is more akin to a network ad. This doesn’t mean it’s useless, but no one is valuing Time Warner or Disney at 30 times their trailing revenue.Even Google, which gives advertisers exactly what they pay for, is only valued at 5.5 times trailing revenue.
The argument has been made that Google is a mature company, with slower growth—last year’s revenues grew 29 percent, compared to 88 pecent for Facebook.
