Facebook's Biggest Challenge? Upending All of Advertising

By Erin Griffith , written on July 27, 2012

From The News Desk

There were a lot of things you could pull from Facebook's earnings call yesterday. Much of it was enlightening: Zuckerberg said it "doesn't make sense" for Facebook to build a phone. He said Instagram was kindof a talent acquisition.

Some of it was less surprising: The company is trying to improve its mobile platform. Also, it's not planning on much growth in gaming income, aka Zynga.

But it was one tiny throwaway comment from COO Sheryl Sandberg that stuck with me. As the company painstakingly educates advertisers on why they should allocate their budgets to Facebook's various ad products, Sandberg added that the company will be "closing the gap between the audience we deliver and our share of advertising budgets."

That line, amid all the in-the-weeds talk of ad pricing and new product tweaks, speaks volumes. Facebook isn't just tasked with convincing advertisers to get onto its platform. It has do so at the expense of massive ad budgets previously allocated to TV. And that is something digital ad companies have been struggling with since the beginning of the Internet.

Keep this in mind: last year digital ads only brought in $85 billion globally, making Facebook's market opportunity smaller than its market cap at the time of its IPO. And that amount is a small fraction of the year's total $588 billion in global ad spend.

Despite the massive shifts in consumer behavior, TV still dominates ad budgets. The gap between time spent and ad dollars spent is even more ridiculously lopsided when it comes to mobile.

I wrote earlier this year for Adweek:

Digital is also still fighting the media establishment, where change is slow. Thanks to the disconnect between time spent and ad dollars spent, it would be easy to argue that the ad industry remains in denial about the Internet. Every doomsday prediction about the demise of old media can today be shot down with a simple point to the scoreboard.
TV ads brought in $68 billion in the US last year. Compare that to the $31 billion spent online, which includes search, display, video, classified ads, sponsorships, etc.

From the sounds of it, Facebook is planning to be a primarily ad-focused business for the time being. Yesterday, I suggested it should be looking to quickly adopt new revenue streams; but Zuckerberg's plan for new lines of business such as commerce appears to be similar to its agreement with Zynga--merely taking a percentage of its partners' Facebook-related earnings.

So for Facebook the advertising company to live up to its valuation,* it first needs to lure the ad dollars to the Internet, period. Then, it needs to convince those ad dollars to come over to social, specifically, its very unique platform that requires brands to publish a very specific type of content for free and then spend money to promote it in something called a news feed. And then, to mobile, the category of most advertisers' budgets still in "experimental" mode, but also where where half of Facebook's users access the site.

This could take a lot of convincing.

At least Sandberg is a very convincing person. She did manage to mend ties with GM after the company basically stabbed Facebook in the back with the timing of its bad news.

Facebook is placing all its eggs in the Sponsored Stories basket. They haven't been selling these "truly social" ads for very long, Sandberg emphasized, and right now more than half of Facebook's ad revenue still comes from the crappy little display ads we see on the right side-rail of the page. Facebook's early intense focus on user experience put them there, where they'd be ignored, and they have been. Clickthrough rates on those ads are reportedly lower than the industry's already-pathetic standard of less than 0.1 percent. But Sponsored Stories tout incredible engagement and ROI, the company's executives say. The ads are so powerful, they're like a whole new category of advertising!

"We're not TV and we're not search, we represent a third medium," Sandberg said on the earnings call. "The right ad on TV or on search is the wrong ad for Facebook. Facebook marketers need to learn to make their ads really a two-way dialogue with users."

At the rate the ad world moves, Facebook is going to be selling us on this plan for a very, very long time.

*Facebook's market cap, by the way, is $73 billion, NOT the $57 billion some are reporting. Google and Yahoo Finance have the share count wrong, but MarketWatch has it right.