Market Overview

GM Doesn't "Like" Facebook, Drops Ads


As we fast approach Friday and all of the talk is focused on Facebook's impending IPO, it was revealed that General Motors (NYSE: GM) is choosing to stop advertising on the social media site as it feels that the rewards are not justifying the cost.

It seems that America is going Facebook mad right now in the lead up to that IPO, with everybody talking about the successes of the company, and what it needs to do going forward. But the actions of GM have highlighted what could be a key question for Facebook, as well as every other social media site: does advertising on social media websites work?

The simple answer is that we don't know yet, but GM is not happy with the immediate results and it is not prepared to gamble going forward. The medium is still too new to be able to point at a reliable set of results, we have no way of knowing how the advertising works over a worthwhile period of time, so any successes or failures that we have so far are purely anecdotal.

But that has not stopped GM from pulling out of Facebook (although it will continue to maintain its page, investing millions in its overall presence). Facebook will, and should, be concerned, as advertising revenue is such a big part of the company's strategy and we are not talking about a small company here. This is GM, one of the giants of world business. If GM says something isn't working, likely it isn't.

GM believes that paid ads on Facebook have little impact on car sales, raising questions about Facebook's ability to maintain 88% revenue growth. First quarter ad revenue was down 7.5% but, more importantly, GM's decision highlights the fact that Facebook's continuing success is not a sure thing.

Estimates suggest that, prior to GM's decision, it had spent $10 million on Facebook advertising. Even though it measures revenue in billions, any company will be unhappy to lose that amount. But it isn't the immediate sum of money that will worry Facebook the most, it is the possibility of other companies taking note and following suit.

"It's not unusual for us to move our spending around various media outlets - especially with the growth of multiple social and digital media outlets," GM said in a statement. "In terms of Facebook specifically, while we currently do not plan to continue with advertising, we remain committed to an aggressive content strategy through all of our products and brands, as it continues to be a very effective tool for engaging with our customers."

That's all well and good, but Facebook will be seriously hoping that GM hasn't just opened up a crack in their previously solid wall. If they do need some comfort, they only need look at Ford (NYSE: F), who continue to believe in the power of Facebook, spending millions on advertising AND building a presence.

"You just can't buy your way into Facebook," said Ford spokesman Scott Monty. "You need to have a credible presence and be doing innovative things."

Follow me @BCallwood.


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