Skip to main content

The sun rises behind the entrance sign to Facebook headquarters in Menlo Park, Calif.BECK DIEFENBACH/Reuters

In May, it looked like a $10-million slap in the face. This week, it began to resemble a $50-billion body blow.

When General Motors Co. said three months ago that it was pulling its paid ads from Facebook because it didn't believe advertising on the site was effective, the move cast a sharp shadow over the company's initial public offering. Two days later, Facebook's stock began trading – and then it began sinking.

And as it has continued to fall amid growing concern among investors that the world's most popular social network isn't the revenue geyser they'd hoped, something else has happened. Some marketing firms have found themselves for the first time having serious conversations about whether Facebook is the right place for their advertising.

If GM's move did not single-handedly prompt Facebook's market value to fall by half in just three months, to $46-billion (U.S.), it did inject a bit of realism into the company's storyline, and prompted a re-evaluation by the very people it needs to win over if it wants to fulfill its promise.

"Everybody was on the bandwagon before – 'We've got to do Facebook!' " said Veronica Holmes, president of digital at ZenithOptimedia Canada, an agency that advises some of Canada's largest marketers on how to spend their advertising budgets.

"And then when all that stuff hit, there was a kind of a – 'Wait a minute, maybe we haven't looked at it thoroughly.' "

Welcome to the tech industry's summer of sober second-thought. For an unusually large number of Web and social media darlings, these past few months have been a harsh lesson in how quickly the stock market can turn nasty.

Zynga, the social game maker that went public late last year, saw its share price drop from a high of more than $14 this March to a current price of just $3, as investors realized that many of the company's users had very fickle tastes and weren't likely to keep playing many of the company's games for very long. Groupon, the online coupon service, hovered at almost $30 a share when the company went public in November of last year. Today, after a series of disappointing earnings reports and accounting controversies, the company's shares are worth less than $5. That means it's now worth $3.1-billion – or about half of what Google Inc. once offered to pay for the company.

But no company has illustrated the post-euphoric downturn of the Web and social media industry more starkly than Facebook. Perhaps the most highly anticipated IPO in a decade when it first hit the market at $38 a share, the stock's plunge has generated nothing but a steady stream of unflattering headlines. In part, the slump is simply a correction of its overheated stock valuation. But a plummeting stock price always leads to worry about the health of the business itself; in Facebook's case, those concerns include the company's seeming inability to penetrate large regional markets such as China, or to generate revenue from users who visit the site using mobile devices.

Underlying all the disillusionment with social media's biggest names is a common theme: For investors, simply building a massive user base – as Facebook and others have done so well – is no longer enough.

"Just as quickly as a company can accumulate one billion users, it can lose one billion users," said Andreas Pouros, chief operating officer at Greenlight, a London-based digital marketing agency. "We've seen that with MySpace, which journalists used to say had social media sewn up."

As Mr. Pouros notes, the number of users a website boasts can often be less important than what those users are doing on the site. For example, Google is attractive to advertisers because users specifically visit the search engine to look for products or services, and they expect to be taken to other web pages.

But with Facebook, users are more likely to want to remain within the confines of its environment, making an ad that takes them to external websites a tougher sell. That's because social media platforms were created to help people keep in touch with others, not to shop.

"You have to respect the consumer and what they're trying to do on these sites," cautioned Hubert Bandurski, the managing director of the Toronto-based digital ad agency Henderson Bas Kohn. "They're going to Facebook to socialize, and not to look for a product."

Increasingly, Facebook and other new tech companies are coming to terms with this reality, and starting to take drastic measures in response.

Over the past few months, Facebook has been engaged in a charm offensive with groups it had ignored in the past, including the media-buying agencies that advise big corporations on where to place ads. And it has unleashed a number of new advertising products, including tools that let advertisers target their Facebook posts at users based on age, gender and relationship status.

In fact, some of the new products and services aimed at lifting revenue are fairly removed from some of the companies' actual business models. For example, Groupon recently launched an electronic retail division In the United Kingdom, Facebook is entering the online gambling business.

"They're under pressure from the public markets, which is making them try to run to catch up with market perception," said Robin Grant, the global managing director of the London-based social media agency We Are Social. "[Facebook is] releasing an awful lot of new advertising products over the last few weeks – some of which don't seem that well thought out, if I'm honest.

"But at the same time, do I think Facebook is a good long-term proposition, especially from a marketing perspective? Yes, absolutely."

Still, the stock market's ambivalent view of the company mirrors advertisers' own difficulty in understanding exactly how to use Facebook to spread their messages.

So-called "click-through rates" – the proportion of times a user clicks on an ad to get their browser to go to another site – are notoriously low on Facebook: roughly 0.035 per cent in the U.S., according to research provided by the digital marketing agency Resolution Media. (By some estimates, Google's click-through rate on ads is about 10 times greater.)

"Finding ROI [return-on-investment] on Facebook is a bit tricky," agreed Mr. Bandurski.

Until now, Facebook has served up advertising only to people who "Like" a particular brand, or to friends of those users. But this week it began experimenting with ads that pop up in users' Facebook feeds – even if they haven't agreed to accept messages from that advertiser.

The practice is likely to upset not just the network's users, but some of the companies that have invested heavily in getting people to "Like" them so they can send out their marketing messages.

But such are the risks Facebook must take if it is to placate increasingly worried investors. In a sense, the social network suffers from a kind of worst-of-both-worlds problem.

It is at once a relatively new company, looking to increase its revenue (estimated at $5-billion this year) quickly, and a global corporation with almost one billion users that can't move as nimbly as a small tech startup.

The sudden and steep share price decline of numerous new technology companies this summer – Facebook among them – has caused some observers to draw parallels with the bust of the dot-com bubble more than a decade ago.

But despite the market carnage that accompanied that bust, some technology companies, such as, managed to ride out the turmoil and emerge with sustainable, profitable businesses. And LinkedIn Corp., which runs the social network aimed at professionals, has done impressively since its own IPO in May, 2011. Its shares are up more than 120 per cent from its initial price of $45.

Still, the current downswing is likely to give pause to a number of high-flying private technology companies, such as micro-blogging service Twitter, which may have been considering an IPO.

"This gives those companies waiting in the wings a serious reality check," said independent technology analyst Carmi Levy.

"It prompts these companies to realize that euphoria is not enough to drive you to go public. You have to have the goods in hand before going public."

Your Globe

Build your personal news feed

Follow the author of this article:

Check Following for new articles