Does Facebook Pass This Test?

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Any college graduate with a business degree took, at one point or another, an introductory marketing course as part of his or her curriculum. As a finance guy, I didn't care one bit about marketing, but life has a sick sense of humor, as my first job as an equity analyst had me focusing on the media and marketing sector day in and day out. So naturally, I was forced to learn a few things about marketing for the job.

In my early research I remember how easy it was to get lost in a sea of industry acronyms, buzzwords, and ratings numbers. It can all be overwhelming for your average investor to digest. But at the end of the day, marketers always rely on the "5 Ms of Marketing" for their marketing decisions: Mission, Money, Message, Media, and Measurement. Those precepts largely determine where ad budgets are spent, and what companies benefit from growing their piece of the pie.

Facebook: the Message
Today, let's see how everyone's favorite IPO, Facebook (NAS: FB) , measures up in its ability to help marketers meet the "Message" objective.


Wikipedia defines marketing as the "processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large." Essentially, it's a means for organizations to communicate a value proposition message. Facebook's paid ads, as they exist today, leave a lot to be desired in this category, particularly in the lack of format options they offer marketers looking to spread their message.

If we rewind a few weeks, the big news before the company's IPO was General Motors' (NYS: GM) decision to reallocate its ad budget away from paid campaigns on Facebook. The move appeared to stem from the lack of format options available to GM, as Facebook denied a large page takeover the automaker requested. While I can't blame Facebook for that decision at this point, it certainly brings to light the problem of Facebook's limited ad format options. At last glance, Facebook really only offers one paid option -- a very basic ad with a title, limited copy, and a small image. The ads are tucked onto the right side of a user's page, where they can be as minimally intrusive to the user experience as possible.

The brand advertising opportunity
As a public company, Facebook now has to balance both the "user experience" and the shareholder experience. Given Mark Zuckerberg's de facto control over the company, there will probably be an imbalance in that focus for quite some time. In fact, it may not change for many years. However, I predict the company will open up to more "intrusive" formats sooner rather than later. Why? According to a recent survey by Vizu, more than 60% of online ad spending will be allocated toward brand advertising in 2012. A separate prediction from Deloitte suggests that, while broader Internet advertising is set to grow 11% this year, online brand advertising will grow 50%!

This growth in brand advertising means tapping that market more effectively is a huge opportunity for Facebook. What's more, it's already giving away a ton of branding exposure for free through its complimentary business pages. The news that GM pulled its paid ads provides a useful anecdote here. While the company pulled $10 million in paid advertising from the site, it's still maintaining about $30 million in spending to maintain its various free brand pages. To be clear, this is money spent to maintain these pages, not money paid directly to Facebook.

Another car manufacturer, Ford (NYS: F) has taken the opposite approach, instead ramping up its spending on Facebook's "sponsored stories." Despite the mixed signals from these automakers, it's fair to assume that GM isn't the only company taking the freeloader approach to its Facebook presence. And while this means Facebook is adding incredible value for brand advertisers, it also means it's doing so at its own expense.

While it's easy to pile on Facebook at the moment given the stock's horrible performance since the IPO, the fact remains that there are some meaningful levers the company can pull to drive revenue growth, but only if it chooses to use them. If you want to learn about a recent tech IPO already pulling some levers, check out our latest special free report, titled "Forget Facebook -- Here's the Tech IPO You Should Be Buying." While only a fraction of Facebook's size, this company has a huge growth opportunity ahead of it and, unlike Facebook, doesn't rely on fickle advertisers as its main source of revenue. To find out what company this is, claim your free copy today!

At the time this article was published The Motley Fool owns shares of Ford and Facebook.Motley Fool newsletter serviceshave recommended buying shares of General Motors and Ford and creating a synthetic long position in Ford. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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