A Modest Proposal for Facebook

Everybody knows that Facebook (NAS: FB) is facing a revenue problem. Ad spots on the world's biggest social network just don't convert to direct sales very often. With the value of those ads collapsing, major retailers are pulling out of Facebook's ad space altogether. The poster boy for this phenomenon is car giant General Motors (NYS: GM) , which doesn't see fit to spend a nickel of its $3 billion annual ad budget on Facebook. Those eyeballs simply don't convert into Chevy and Cadillac sales.

So far, so bad. CEO Mark Zuckerberg needs a miracle that brings advertisers back. The revenue-per-page-view metric is falling apart, so it doesn't really matter how many billion page views or new users the site can muster. Total sales have peaked anyhow. Zuckerberg is a billionaire today, but he might starve in a few years if this trend can't be stopped.

But dig a little deeper and you might find a solution to this problem -- and it doesn't even involve having Facebook sell its most prized assets to stay alive, as some othercompaniesare doing today. Reuters chimes in from the ongoing Internet Retailer Conference with glad tidings. Small businesses that drop their Facebook ads entirely say that their sales do take a hit from the move, only to recover when the ad dollars come back.

To me, that's a clear sign that Facebook is selling its ads the wrong way. Today, you buy ad spots based on the cost per click, also known as CPC. I firmly believe that Facebook ads would be better served by the alternative cost per impression, or CPM, model.

A modest proposal
Hear me out. To me, Facebook doesn't have to eat itself alive:

  • It seems that Facebook users do notice ads on the site, and that the branding impressions stick in our brains after leaving the site.

  • Nobody is in the mood to go shopping when talking to their friends or playing casual games on Facebook. The purchases come later, without a direct link from Facebook to the retailer.

  • This makes it impossible to assign value to Facebook ads under the CPC model. It makes billions per quarter for Google (NAS: GOOG) because Big G often catches consumers in a shopping mood -- and throws them right to a retailer that can help.

  • When the real value of your ad lies in whether people have seen it, and not in purchase-inducing ad clicks, the CPM strategy works much better.

Until Facebook adopts the CPM model, retailers will be better off simply maintaining a totally free Facebook presence, posting "like" buttons on their own properties, and other activities not related to buying ad spots. Making companies pay for their Facebook pages might seem like another obvious option, but it would have to be done with amazing finesse, lest retailers simply abandon the site altogether.

It wasn't pretty when Netflix (NAS: NFLX) changed its pricing model last year, and the company is still suffering from management's tactless handling of that gaffe. Facebook could very well see a similar revolt if it presents paid-for pages the wrong way. Simply adjusting the ad sales model appears a much safer and ultimately more satisfying strategy.

I have a big red thumb in my CAPScall on Facebook right now, but that could change in a hurry if the company adopts a more sensible ad sales strategy. But until that happens, The Fool's top analysts have uncovered another recent tech IPO far more worthy of your investment dollars. Unlike Facebook, this company has found solutions to the online revenue problem. Get the name of this amazing company and a deep-down analysis of its business in this special report -- totally free for a limited time.

At the time thisarticle was published Fool contributorAnders Bylundowns shares in Netflix and Google and has created a bull call spread position on Netflix. He holds no other position in any of the companies mentioned. Check outAnders' holdings and bio, or follow him onTwitterandGoogle+. The Motley Fool owns shares of Facebook , Google, and Netflix.Motley Fool newsletter serviceshave recommended buying shares of Netflix, Google, and General Motors. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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