Does Facebook Have a Winning Advertising Strategy At Hand?
Facebook (NASDAQ:FB) has a problem with advertising, and the company has tried every method possible to use as a remedy, from launching sponsored posts to creating an updated — read more advertising-friendly — layout to purchasing Microsoft’s (NASDAQ:MSFT) ad-service business Atlas.
Approximately 84 percent of the company’s revenue is derived from its advertising business, and so new schemes are consistently tested and rolled out to make its strategy more effective. The social network’s latest attempt to refine its ad business, announced Tuesday, enables marketers to tailor advertisements based on users’ browsing history.
This system — called Facebook Exchange — has already been used to place graphical display advertisements in the sponsored ad box on the right-hand side of a Facebook user’s page. Now, as Reuters reported, the company will incorporate the targeted ads into Facebook’s NewsFeed, tying “together two of the most significant innovations that Facebook Inc has made in the past year to its advertising business.”
The inclusion of advertisements based on various products’ websites that users have visited in the past was a much needed update; last year, the launch of Facebook Exchange was applauded by marketers, as the common online advertising technique was long missing from the social network’s lineup.
While Facebook said that the system will initially only be available for newsfeeds appearing on desktop computers, the move is still an important one for its mobile application. Advertisements that appear directly within the Facebook News Feed are considered critically important to its future profitability because they can be seen on mobile devices like smartphones. According to Reuters, about two-thirds of all Facebook users accessed the site from a mobile device in December.
Mobile advertising has been a problem at the forefront of the minds of both investors and the company itself. While the last quarter showed that the company generated 23 percent of its total revenue from mobile advertising, an increase from the previous period’s 14 percent, that growth is not yet sustainable. Facebook’s efforts to launch new advertising services – including those aimed at mobile – had a cost. Its increased focus on advertising contributed to a 79 percent fall in net income, which shrank to $64 million as operating expenses jumped 82 percent. That growth outpaced the company’s 40 percent revenue gain…
Mobile is where technology is headed, and advertising is the primary way Facebook makes money, so the company is giving this particular problem a significant amount of attention. But analysts do not feel that the social network has found the right solution yet, although Facebook Exchange is far closer than its previously announced “Dark Posts.”
BTIG Research’s Rich Greenfield wrote that this Facebook advertising product, which was rolled out last week, smelled of “desperation.” Noting that the new dark posts are actually moving advertising further away from context and relevance, Greenfield reiterated a Sell rating on the company’s shares and a $22 price target.
The social network seems to be following a strategy that calls for throwing any and all advertising options into the mix and seeing what sticks. Dark posts are a prime example of this; as described by Facebook itself, this method provides an opportunity for “advertisers running messages that are relevant only to non-fans” and “advertisers with ad messages that are not aligned with the tone of the Page” to reach users.”
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