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The Big Doubt Over Facebook

By Suzanne Vranica | The Wall Street Journal 5/2/2012
The doubt lingers as bankers and prospective investors decide how to value Facebook for an initial public offering planned for May 18, said people familiar with the matter. Facebook executives will be pitching the company to investors in an IPO roadshow starting Monday, these people said.
"The question with Facebook and many of the social media sites is, 'What are we getting for our dollars?'" said Michael Sprague, vice president of marketing at Kia Motors Corp.'s North American division.
The automaker has advertised on Facebook since 2009 and plans to increase its ad spending on the site. While building brand awareness on a site with 900 million users is valuable, Mr. Sprague said he's unclear if "a consumer sees my ad, and does that ultimately lead to a new vehicle sale?"

The concerns from Kia and other advertisers underscore the difficulties of measuring results of nascent-forms of social-media advertising.
Google Inc. and Yahoo Inc. sell traditional display and search ads on their sites. Facebook also offers image and text-based ads, but it pushes new methods that haven't been fully tested.
For example, last year Facebook launched a "Sponsored Stories" feature that lets advertisers rebroadcast people's posts on the site's main news feed to highlight them. Advertisers pay a rate based on impressions, or views those posts get.
While advertisers can directly track the return from ads on Google and Yahoo, Facebook mostly doesn't permit third-party surveys on its site or allow ads to be tagged with "cookies," software that tracks what people do online after seeing an ad.
Last week, Facebook showed its advertising growth doesn't always go up. The company reported its first-quarter ad revenue rose 37% to $872 million from a year ago, but it was down 7.5% from the previous three months. Facebook blamed "seasonal trends" for the decline, as well as shifting user growth where the company generates less revenue per user.
The questions about Facebook's ad business also creates a dilemma for bankers and investors who must decide whether Facebook deserves a lofty valuation. People familiar with the matter have said Facebook will seek a $100 billion valuation.
At that figure, Facebook's valuation would also be about 33 times its advertising revenue, compared with 5.5 times for Google. The reason for the discrepancy is largely because Facebook is still a young company with faster growth than Google, which is worth about $200 billion but had $36.5 billion in ad revenue last year.
Jed Williams, an analyst at BIA Kelsey, said that in order to justify that valuation, Facebook's revenue would have to grow 41% annually for the next five years. That's a much steeper climb than Google's recent revenue growth of 24% in 2010 and 29% in 2011.
Still, Mr. Williams said much of Facebook's valuation isn't about the current hard numbers of its ad business, but said it's a "more general bet."
"When you have an audience that sticky and big you'll figure it out," he said. "If you're Facebook, you have to figure it out in a hurry."
Advertisers, meanwhile, are trying gauge their own performance on Facebook. In March, Martin Sorrell, chief executive officer of WPP, the world's largest ad company, told attendees at a conference that "clients, for the very first time, are starting to question the measurement issue" on social media.
"The area is a very sexy area, and clients have gone in almost willy-nilly, because it's fashionable to do so," Mr. Sorrell added. But now that such ad spending has ramped up, he said finance departments "are increasingly starting to look at the value of those investments."
WPP, which works on behalf of companies such as Unilever PLC and Procter & Gamble Co., said it expects to double its ad spending on Facebook this year to about $400 million. WPP said it will spend "north" of $2 billion with Google this year, up from about $1.6 billion last year.
It doesn't help that Facebook has alienated some advertisers with what they perceive as a highhanded attitude that implies that marketers have nowhere else to turn. Some media buyers said Facebook has stymied their attempts to get more ad measurement, for instance.
"There's a pretty high degree of animosity right now with Facebook because they have become so powerful," said Rob Griffin, global director of product development at Havas Digital, a unit of Havas SA. The tension, he added, is partly the result of how quickly Facebook has had to scale its business.
For its part, Facebook has made repeated attempts to quell marketers' concerns about the effectiveness of its ads. Last year, the company began working with research firms comScore Inc. and Nielsen Co. to offer tools that let big brands track their social media campaigns on the site.
Nielsen, for example, measures consumers who saw an ad on Facebook and compares them with a similar control group of Facebook users who didn't see the ad. It matches that against shopper data to see how ad exposure affected a product's sales.
Some big advertisers have conducted research that shows social networking campaigns have boosted their sales. Ford Motor Co. said by using Facebook ads instead of Super Bowl ads in marketing its 2011 Explorer, shopping activity for the Explorer jumped 104% versus the average shopping lift of 14% following a Super Bowl ad.
A Ford spokesman said more than 20% of the company's digital media spend is on Facebook, but declined to be specific. "The number one trusted source of information for consumers is recommendations from friends and family," he said. "Facebook provides a reliable platform to leverage that insight at scale." Still, he said it's difficult to measure Facebook's value against other forms of advertising.
On Tuesday, research firm eMarketer released a study showing 84% of executives it recently polled said that social media campaigns had boosted the effectiveness of sales and marketing efforts. Yet eMarketer also said that "while measuring followers and Facebook 'likes' provides marketers with a hard number, no one yet knows how those numbers translate into a quantifiable return for brands."
Some ad executives caution that a calculation of monetary returns is an incorrect way of viewing Facebook ads.
"If a marketer measures [return on investment] as direct sales from the Web, then Facebook may not be the ideal platform," said Sarah Hofstetter, president of digital ad agency 360i, a unit of Dentsu Inc. "But if the goal is to move the needle on brand health metrics... then Facebook should be a key part of the marketing mix."
Kia, meanwhile, said it is working with Facebook to get better measurement of the effectiveness of its ads. Kia declined to provide ad spending figures.
For now, "being on Facebook sends a message," said Mr. Sprague. "Consumers they say 'Facebook is working with Kia, I like Facebook ergo I like Kia.' That's what we are hoping for."
Martin Peers contributed to this article.