Facebook’s Great Expectations

Everyone at Facebook just got rich. The hope, the dream, The Great Expectation,  was that the IPO could make investors rich also. That would validate social media as a viable investment, and create the kind of Wall Street voodoo that would shower the industry with hedge fund money for years to come. But early investors are taking a bath, and it is clear that the company knew that the revenue forecast was pointing a little less heavenward than the pro-formas would have it. (The stated culprit is that the migration to mobile is even quicker than assumed, and mobile is a less effective advertising vehicle). Now this is where the IPO underwriters stepped on the chalk: they verbally told institutional investors that they had adjusted the revenue forecast downwards during the roadshow (an unprecedented move by most accounts), but somehow forgot to disclose to retail investors. Oops.

The “oversight” has been noticed at the SEC and the Justice Department. They are considering investigations. There is a class action law suit. Oops.
By the looks of it, there are issues with the advertising product itself, and that would be the revenue engine in this case. After working many years in a media agency (I was a general manager at Universal Media, and we did have GM as a client in Scandinavia,) I can see them all too clearly.
John Wanamaker, a retailing pioneer, once said: “Half the money I spend on advertising is wasted; the trouble is I don’t know which half.”
That used to be the case for almost all advertising for decades, except direct response. You used imperfect yardsticks: reach and frequency, GRPs, TRPs—all largely depended on polling results, diaries for radio, and set-top boxes that could only tell you that a TV set was on—not whether anyone was watching. You never knew, and trusted the wisdom of Mr. Wanamaker. Somewhere in your media mix, between the magazine ads, the full-page ads in broadsheets, and your radio and TV, was something that worked, among other things that probably didn’t. But what exactly was never clear. So you went with the whole package.
With its Facebook buys, GM knew: it is the Facebook part that doesn’t work. That’s why GM’s media agency probably recommended the cut. This does not mean that it doesn’t work for half the advertisers. We just don’t know which half yet, and that is a problem for FB. Every online media buyer is on notice after GM’s action: it’s OK to cut Facebook from your media mix. If you don’t, and the results aren’t there: hello agency review.
And if it is OK to cut Facebook from your media mix, then an SEC investigation is not the company’s only, and not even its biggest, problem.
This debacle may make FB a better company. In the age of the click-through they might just have to grow up in a hurry, and become much more sanguine about which advertisers might benefit from the vapid, superficial and mostly tedious content environment that stares most Facebook users in the, well, face. That environment is unforgivingly honest, and one might assume that Mr. Wanamaker would have loved it, even if it didn’t sell a single set of aluminum pots for him.
But then again, he would have known which half to cut.

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