February 23, 2012 – 2:59pm EST: Recently leaked documents sent by Facebook to select social media advertising agencies reveal that privately-held Facebook plans on revamping its Premium Ad campaign, phasing out the old ad system by February 29th, 2012. Facebook's not yet publicized new "Premium Ads" product will have a larger format and more intrusive placement and distracting features that will appear on users' profiles. In addition to a much larger size than current ads, advertisers will be allowed to add distractions such as video and sound to what were previously text ads. In the leaked documents to ad agencies, Facebook touts that the new formats should hopefully increase "engagement by 40%", with an "80% increased likelihood to be remembered," without citing any supporting data. Facebook hopes the new formats help to address the problem that users are tuning out ads on the social network as well as the failed e-commerce attempts by retailers.
[See the Leaked Documents on PrivCo’s Facebook Report]
These documents - coupled with other rapidly rolled out changes that boosted the pervasiveness and intrusiveness of Facebook ads - and the consistent feedback from advertisers that Facebook advertising has not resulted in measurable results for advertisers - are evidence that the company is struggling to meet its financial projections as its IPO looms imminently. As PrivCo predicted based on its sources, Facebook’s 2011 Ad Revenues in its IPO filing were well below all analyst estimates (except PrivCo's): 2011 Ad Revenue was $3.145 billion (Analysts predicted at least $3.9 billion; Facebook missed its mark by 20%). Facebook's ad revenue growth rate also took a steep hit, only increasing 69% year over year in 2011 (whereas ad revenues grew 146% between 2009 and 2010).
In a series of reactionary moves culminating in the now planned Premium Ad Units, Facebook is clearly choosing to increase its ad intrusiveness and frequency to pad its numbers short term in preparation for its IPO and first quarter results post-IPO trading, at the cost of user experience and long-term growth.
PrivCo, the private company financial data authority, has analyzed the leaked documents, confirmed with other sources, and examined the evidence in conjunction with recent rapid-fire changes in Facebook's ad intrusiveness and frequency (all implemented by senior management in the weeks leading up to its IPO filing to attempt to make up for ad revenue shortfalls). Among others, these are the key indicators Facebook is scrambling to meet its short-term numbers by sacrificing user experience for short-term ad revenue boosts:
The Top 6 Red Flags Facebook is Scrambling to Boost Short-Term Ad Revenues
- New Interactive Ads: The biggest change in the new ads show a more streamlined approach for advertisers, who can now transform any one of six page posts (status updates, photos, videos, links, questions, and events) into an ad. The premium ads add an additional layer of engagement: Users with friends who are Fans of said page will automatically display along with the ad. These changes are aimed at drawing user attention towards the ads and increase user engagement.
- Increasing Sidebar Ads: The number of side ads increased from 2 to 3 and from 3 to 7 within a short, two month period. Since Facebook primarily gets paid via user interactions with its ads, Facebook has chosen to sacrifice its click through rate to load the side bar with more ads in an attempt to increase user interaction.
- SideBarAds Now Follow the User During Page Scrolling: The sponsored ads also now remain pinned to the sidebar as the user scrolls down, adding to the annoyance of the ads. By moving the user’s friends list to the far right side of the screen, users must now scan through the ads as they go back and forth between the friends list and the news feed. Again, another attempt at drawing users towards the sidebar.
- Sponsored Stories in Newsfeed: Introduced early this year, sponsored stories are now featured in a user’s newsfeed. The move continues to blur the line between advertisement (which is typically kept to the side) and content.
- Friends Discounts: Facebook apps now reward users for bringing friends to an event or venue, bribing users with discounts based on the number of friends they bring.
- Autoshowing User Actions: Many Facebook apps now require the user to automatically share their actions. A song you are listening to on Spotify, ticket bought on TicketMaster, and a recipe shared on Foodily are all fair game for a person’s news feed.
The next couple of months will be trying times for Facebook. Since Facebook filed its IPO February 1st, it has a rapidly narrowing window to push through its IPO before it must file its first quarter financials by May 15, regardless if it goes public. The first quarter numbers will come shortly after, and meeting expectations are critical for the stock to trade positively and allow planned follow-on offerings. PrivCo research shows that the 1st quarter for Facebook has recently shown sequential pressure after a seasonally strong fourth quarter (in fact, PrivCo data shows that Facebook's traffic fell in January 2012 from December 2011). As such, Facebook management is now scrambling to bolster its numbers quickly by updating its Premium Ad campaign, more than doubling total number of ads per page (further reducing the performance for individual advertisers), imposing sponsored stories into users' news feeds, imposing a "fixed non-scrolling sidebar" that follows the user, and auto showing user actions. These changes have been done in a matter of weeks, the fastest and most aggressive ad expansion in Facebook's history. All this comes at a cost to the user's experience, who must deal with more intrusion to an already cluttered visual experience.
[See PrivCo’s Full Report on Facebook, Inc.]
In addition, Facebook is faced with many popular retailers including Gamestop, Gap, JC Penny, and Nordstrom closing their storefronts on Facebook’s site, further driving down user engagement and (in turn) ad revenues.
Facebook’s attempt to boost its ad revenue in these manners - something Google for example has wisely resisted, but similar to the page ad-cluttering MySpace unwisely attempted - is a very short-sighted immediate revenue enhancer, indicates that Facebook is not nearly as big or monetizable as once thought. With nothing more left on the table to pull out if it needs to hit its numbers, it bodes poorly for Facebook's ad revenue growth potential in 2013.
"These are the types of actions ad-supported companies save for a Rainy Day," says Sam Hamadeh, CEO of PrivCo. "It should be a red flag for investors that Facebook apparently considers that Rainy Day to be now."
