Perhaps one of the best advertising campaigns of all time was the "Where's the Beef?" series from Wendy's in the mid-'80s. While appealing to little old ladies and their ravenous appetite for large, juicy hamburgers was likely enough to justify running the commercial back then, advertisers have evolved over the years to require increasingly measurable performance metrics from campaigns. In other words, arithmetic on Madison Avenue no longer means splitting up the martini tab at lunch, but instead involves robust return-on-investment analysis.
Which brings me to General Motors' (NYS: GM) recent announcement that it's pulling paid campaigns from Facebook (NAS: FB) and focusing resources on the social network's free business pages. With billions set aside for ad spending each year, GM is one of the largest advertisers in the United States. Does this move from a big spender speak to fundamental weaknesses with Facebook's ad performance, or was this an isolated event, as recent news suggests it might be? While much has been written about the concerning trend that Facebook users are migrating toward its mobile app, a platform with which it has yet to monetize at all, the structural issue of ad performance concerns me more.
Online Ads 101
The most successful online advertising company is unquestionably search leader Google (NAS: GOOG) , so I set out to compare the attributes of the incumbent powerhouse with the burgeoning newbie and stumbled upon a report card published by search marketing services provider Wordstream. The comparison details a number of the key differences between Facebook and search Google across a number of categories. While both platforms booked A's in elective subjects like "Advertising Reach" and "Growth," there were some disparities between the two when looking at the more technical subjects of Ad Targeting, Formats, and Performance. Let's dive a bit deeper into the grades Wordstream doled out for each.
In this subject Facebook falls well short of Google, lacking the ability to target mobile users, syndicate ads on other sites, or address consumer intent in the way keyword ads can. In fact, Facebook boasts only one unique targeting option relative to Big G -- the ability to target users based on profile data such as work, education, and other interests.
Recent news suggests that GM's move was done in response to Facebook's denial of a large page takeover it requested. The denial stemmed from Facebook's intense focus on creating an uncluttered user experience, which comes at the expense of format options for brand advertisers like GM. It also speaks to a bigger problem for Facebook -- a sole reliance on one platform to deliver ads for customers. Google, on the other hand, has diversified away from a text-only shop to offer display, video, and mobile gaming advertisements. The main Google search page alone doesn't lend itself to these alternative formats, which is where moves to expand its reach through the AdSense network, YouTube, and Android operating system prove their worth.
Perhaps Wordstream was grading on some sort of curve here, with the remainder of the class consisting of defunct Yellow Pages publishers, because the data suggests a much wider gap in performance than these grades suggest. One stat that stood out as particularly shocking related to click-through rates, or a users' propensity to click on an ad they are exposed to. Here, ads on Google's main search page boasted click-through rates 100 times that of Facebook display ads. On a more apples-to-apples basis, Google's display ads performed 10 times better based on click-through rates. In spite of this disparity in performance, rates on the social network rose by 40% in the first quarter while click-through rates declined 8%, which can't do much for that ROI calculation.
While I understand this report card is one firm's assessment and is subject to some inherent biases, it doesn't change my belief that there are fundamental flaws with Facebook ads as they exist today. Users of Facebook are primarily there to consume social information, as evidenced by the company's mission "to give people the power to share and make the world more open and connected" and confirmed by the extremely low click-through rates of its ads.
On the other hand, Google's mission to "organize the world's information and make it universally accessible and useful" speaks to a more broad application to all information anyone would ever want to find. As advertisers look to further their commercial interests, the latter appears to offer the correct alignment of users' need for information and advertisers' need for return on investment. The lofty budgets being allocated toward Google search from the likes of Amazon.com (NAS: AMZN) and AT&T (NYS: T) , both of which are spending more than $40 million a year on paid search, show that Google is providing that ROI for the big spenders. Now its Facebook's turn to do the same.
The negative sentiment surrounding Facebook is palpable, and at this point I'm not convinced it's overdone. Facebook has a lot to prove as a public company, but if you're looking for an online leader that's already proving itself, this company is a fraction of Facebook's size but boasts some revenue weapons the social-networking juggernaut probably wishes it had. Find out more about this company in our special report: "Forget Facebook -- Here's the Tech IPO You Should Be Buying." Pick up your free copy today.
At the time thisarticle was published Brenton Flynn owns shares of Amazon and AT&T. The Fool owns shares of Google.Motley Fool newsletter serviceshave recommended buying shares of Amazon.com, General Motors, and Google. 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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