Facebook’s Unproven Model  

Quickly: name the last advertisement you saw on Facebook. 

If you can’t name one, than how effective was Facebook at delivering that ad? 

Although internet advertisement exposure is one of the most measurable mediums available, we are beginning to wonder just how much business internet advertising actually generates. 

We think there is more of this happening today than most in the industry or investment world are willing to admit. This line of thinking was strongly reinforced when General Motors announced it was dropping all advertising on Facebook, just one month before Facebook’s IPO. 

General Motors' Decision On Facebook Ads

General Motors, which is consistently in the top ten spenders on advertising in all mediums, determined that advertisements purchased on Facebook simply weren’t worth the expense. Those ads weren’t selling cars. 

GM announced it would drop its Facebook ad campaign, which totaled $10 million. 

The simple reason was that GM decided the ads were not working. "Internet ads don't work for cars" was the conclusion that many reached. 

But what if the GM decision is really just a presage of the future of internet based advertising? 

Does internet based advertising really work? 

We examined this concept before in a prior Ahead of the Curve column focused on GM and Facebook ("GM Clicks "Don't Like" on Facebook" published on May 17, 2012) and again in a column on August 2, 2012, entitled "Facebook and the Great Internet Advertising Dream."

In those columns, we focused on Facebook specifically. But what about advertising on the internet in general? Is it working? 

The first step in looking at this is the role internet advertising plays in the total advertising market. 

The Advertising Market – Global and US

The overall global advertising market (advertising purchased from media sources) is estimated at approximately $457 billion annually in 2011 and growing to $480 in 2012 (source: Magna Global). 

The global internet advertising market is estimated at about $84 billion in 2011 and $98 billion in 2012 (Magna Global). 

The US share of the total advertising market was estimated at approximately $144 billion in 2011 (source: Kantar Media), which makes it about 33% of the global spending number estimated by Magna Global. 

Kantar Media also estimated the internet portion of the US advertising market to be approximately 19% in 2011, which calculates the US internet advertising market at about $27 billion in 2011. 

It is interesting to note that the global internet percentage of the total global advertising market calculates out to about 18% using the 2011 Magna Global numbers, which is reasonably close to theMedi Kantar Media calculation.  (We do not have 2012 Kantar Media numbers available.) 

Google and Facebook Market Shares 

Assuming that estimates for Google revenue, Facebook revenue, and the projected growth in advertising segments done by Magna Global are reasonably accurate, an interesting picture emerges of Google’s and Facebook’s market shares. 

The global internet advertising market is estimated to be $98 billion for 2012. Google’s advertising revenue is estimated to be $50.4 billion for 2012, giving them just over 51% market share. 

Facebook’s revenue is estimated to be $4.9 billion in 2012 giving them just about 5% share. 

This makes both companies excellent proxies for the overall internet advertising market space. 

If Facebook’s advertisements are judged to be ineffective by General Motors, does that imply that other Facebook advertisers might come to the same conclusion eventually? If they do, there will not be press releases each and every time, as General Motors made. 

And if Facebook ads are deemed ineffective, does that have an implication on internet advertising in general? Might Google advertisers eventually come to similar conclusions? After all, how different are Google banner ads from Facebook banner ads? 

Growth Of The Internet Advertising Market 

A very interesting picture of the internet advertising market appears when the estimated growth in 2012 is compared to the estimated growth in revenue from Google and Facebook. 

The following table illustrates the growth in the global advertising market and subcategories with the growth in Google and Facebook. The 2012 numbers for both stocks are a combination of the actuals from the first half of 2012 and the estimates for the second half. Market size estimates are from Magna Global projections made in May of 2012. 

Source: Magna Global, S&P Capital IQ

From this table there are two very intriguing observations. 

First, Google and Facebook together roughly account for the entirety of the increase in global internet advertising.  .

This means all other internet based advertising companies add up to a “wash.”  Whoever gains advertising revenue offsets revenue lost from others.  

This should be a very serious warning sign for any website that is based entirely upon the advertising business model.  

In fact, it probably means it is too late to start a new website based upon advertising alone. It is no longer a greenfield world. 

Secondly, the growth in internet global ad spending and TV global advertising account for the entire increase in global advertising spending.  

This means that there is a “wash” in revenue levels from all of the other media sources selling advertising.  

In general, this means that the revenues for all other media are roughly staying flat. Revenues in newspaper print and magazine advertising are slightly declining, while radio and other advertising (such as billboards) is slightly rising. Overall, however, these other segments are mostly flat.

The only significant growth, or at least growth larger than overall GDP growth, in the advertising industry is occurring in television and the internet. 

Conclusions

What this data shows is that the widely held idea that internet advertising is stealing revenue from television markets is wrong. The growth in internet advertising spending actually represents increases in overall advertising spending. With a weak economy, how long is it before advertising budgets come under increasing scrutiny?

We started this column with the question: How much advertising can we swallow? 

What that really means is, what is the limit on how much money advertisers will spend?  

Ten years ago, the allure of the internet was once so appealing that every major advertiser was asking themselves “how do we get a presence there?” 

Facebook’s stature is entirely built upon the allure that they have built the ultimate fulfillment of the internet advertising dream: capturing the most eyeballs possible – and having detailed demographic information on each of them individually. 

Yet General Motors, one of the top ten spenders of advertising in the world, came to the conclusion that Facebook ads didn’t work. 

Was General Motors unique in this conclusion? Are others reaching similar conclusions, but not issuing press releases about it? 

We are beginning to think that the great allure of the internet as the ultimate advertising machine might be dimming. It certainly bears watching as we head into the future. 

Just ask yourself: name an ad you saw on television recently. We suspect you can think of at least one, even if you didn’t like it. 

Now ask yourself what the last ad you saw on Facebook was.  

Comments may be emailed to the author, Robert V. Green, at aheadofthecurve@briefing.com