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Facing angst over ads

Jim Willis Modified: December 21, 2013 at 4:55 pm •  Published: December 21, 2013
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Facebook is both a creative and marketing success story, and that may be one of the biggest understatements of 2013.

Begun at Harvard as “Facemash” on Oct. 23, 2003 (a century ago in social media years) as a place where students could judge others as “hot or not,” it has grown into something just a bit bigger.

A view of an iPhone in Washington Tuesday, May 21, 2013, showing the Twitter and Facebook apps among others. A new poll finds that teens are sharing more about themselves on social media. They’re also moving increasingly to Twitter to avoid their parents and the "oversharing" that they see on Facebook.  (AP Photo/Evan Vucci)
A view of an iPhone in Washington Tuesday, May 21, 2013, showing the Twitter and Facebook apps among others. A new poll finds that teens are sharing more about themselves on social media. They’re also moving increasingly to Twitter to avoid their parents and the "oversharing" that they see on Facebook. (AP Photo/Evan Vucci)

That number starts with a B

At latest count, Facebook says it has more than 1.1 billion users worldwide. Many of those consider themselves addicted to it.

So how could a company that successful, with that kind of critical mass appeal, worry about making money? Answer: It doesn’t really but, like all businesses, it would like to make more. And how to go about doing that, without alienating its loyal users, is where the educated guessing begins.

Some fast facts

Before that, however, here are a few facts about Facebook, its revenue picture and its expenses, courtesy of its own published revenue report for 2012:

* The company’s gross revenue was $5,089,000,000. If you get lost in the zeroes, that’s almost $5.1 billion.

* The company’s operating margin (using generally accepted accounting practices or GAAP) was 11 percent. It also reports a non-GAAP operating margin, which is 44 percent.

* Net income: $53 million (using GAAP), or $1.317 billion (using non-GAAP).

* Mobile revenue represented approximately 23 percent of advertising revenue for the fourth quarter of 2012, up from approximately 14 percent of advertising revenue in the third quarter of 2012.

* For the fourth quarter of 2012, revenue from advertising was $1.33 billion, representing 84 percent of total revenue and a 41 percent increase from the same quarter in 2011.

The conclusions

At least three things stand out from this data:

1. Advertising is vital to the success of Facebook and brings in the lion’s share of its revenue.

2. Mobile use of Facebook has increased its revenue even more.

3. It costs a lot of money to operate Facebook. While $53 million may seem like a huge net income from operations to some, others look and wonder why it’s so small in comparison to the $5.1 Billion operating revenue. For just the fourth quarter of 2012, for example,  costs and expenses were $1.06 billion, an increase of 82 percent from the fourth quarter of 2011.

With so many users logging in routinely, uploading photos, videos, and statuses, Facebook incurs a gigantic bandwidth bill. And it is vital that users not experience delays in the log-in or upload process, lest they move on to another social media site.

Young adults speak

One of my student teams at Azusa Pacific University conducted its own survey in April to analyze the use of Facebook by people ages 18-25. Here are some of their findings of the 102 they surveyed:

* More than 75 percent said they spend from 3 to more than 10 hours a week on Facebook.

* About 20 percent of the 102 consider themselves Facebook “junkies” spending at least 8, and as many as 15,hours a week on the site.

* Asked what they would like to see changed about Facebook, the responses included advertising (making ads less prevalent)  privacy settings (making them easier to use), cyber-bulling (eliminating it), and making the site less “addictive.”

A view of social network site Facebook's new server farm, in Lulea, Sweden, Wednesday June 12, 2013. Facebook on Wednesday started processing data through its first server farm outside the United States, on the edge of the Arctic Circle in Sweden. The company inaugurated servers in about half of its new, 300,000-square foot (28,000-square meter) facility outside the city Lulea. (AP Photo/Susanne Lindholm, Scanpix Sweden) SWEDEN OUT
A view of social network site Facebook's new server farm, in Lulea, Sweden, Wednesday June 12, 2013. Facebook on Wednesday started processing data through its first server farm outside the United States, on the edge of the Arctic Circle in Sweden. The company inaugurated servers in about half of its new, 300,000-square foot (28,000-square meter) facility outside the city Lulea. (AP Photo/Susanne Lindholm, Scanpix Sweden) SWEDEN OUT

The suggestions

Regarding advertisements, the team concluded it would advise Facebook to do the following:

1. Take the ads out of the news feed.

2. Reward users for spending more time on Facebook by reducing the number of ads that appear on a user’s page in exchange for the number of hours the user spends on FB. For example, if you spend 8 hours a week on the site, then the number of ads on your page is reduced.

3. Offer the user the ability to customize where the ads are place on their page. Give them different template options to choose from.

These are all interesting findings and suggestions coming from those in the very age group to which Facebook targets much of its appeal. The team included students Tara Nunley, Ashlee Bromlee, Heather Wilson, and Collin Parker.

Video ads coming

Thinking about all this made my antenna start vibrating Wednesday when I read a story in USA Today about a new advertising practice Facebook is unveiling: placing automatically-triggered video ads in user’s news feeds.

The story, written by Scott Martin, says in part:

“Facebook on Tuesday said it soon plans to begin video advertising within members’ news feeds, a move that takes aim at massive spending budgets for television ads  … Facebook’s video advertising foray squares off against Google’s increased efforts to attract billions of dollars to its massive video-sharing audience at YouTube.”

Walking a tightrope

This might sound like a good idea to Wall Street and Facebook’s shareholders, but will it work? Will the practice on YouTube of forced viewing of ads, in advance of watching a user-generated video, work on a social media site where users just want to chat with each other?

It didn’t work too well on MySpace (remember it?), where ad clutter sent millions of users scurrying to Facebook.

As Martin points out, Facebook faces the challenge of incurring user outrage over increasing the profile of ads in the news feed by using aut0-play video ads. Yes, you may be able to mute the audio, but the video is still there.

According to Martin’s report, the new video ad foray (which debuted to selected users this week in promos for the new film, “Divergent”), could bring in between $1 million and $2.5 million each day.

The reaction

Two days later, Martin followed his report with reaction from FB users about the prospect of video ads on the site. That reaction was not good. One response from a young user read as follows:

“I have limited my Facebook use as it is. Perhaps introducing video advertisements will make my usage even less frequent,” says Allen Navasero, a junior at Cornell University.

A need for alertness

Although it seems hard to believe Facebook could actually fall from grace with enough users to dent its bottom line, any successful business must be on guard about becoming too arrogant or complacent with its customers.

The company has already the seen the kind of negative blowback from users each time it has changed the site’s format, forcing users to navigate its functions differently. Change comes hard to many people, especially when they just got comfortable with the old format.

In the world of the social media especially, there are always other contenders waiting for the leaders to stumble so they can take their place.