General Motors' decision to pull its advertising on Facebook comes as a blow to the social network on the eve of its IPO and will likely heighten skepticism about the effectiveness of advertising on the site as its business model comes under increased scrutiny.
The automaker confirmed a report by The Wall Street Journal Wednesday that GM’s marketing executives had halted $10 million in ad spending on Facebook because it found the ads had little impact on consumers. The company will still maintain its brand page on Facebook, but end the use of paid advertising.
"We essentially regularly review where we are with overall media spend and it's not unusual to adjust along the way," said a GM spokesperson. He added that the automaker, which has 3780,00 fans on Facebook, would continue to pursue an "aggressive content strategy" on the social media platform for its product and brands.
GM reportedly spends about $40 million on its Facebook presence, of which a quarter had gone to paid advertising on the social network. That amount itself is only a tiny fraction of the $1.83 billion the company spent on advertising last year, according to Kantar Media, making it the third-largest U.S. advertiser behind Procter & Gamble and AT&T.
GM had to reassess the value of its advertising on Facebook earlier this year as its marketing team began to question the return on investment. The move also comes as Facebook’s core advertising business is under increased scrutiny in advance of its IPO, expected to give the company a valuation north of $100 billion.
For all the buzz surrounding Facebook and social media marketing, brands have long complained about the difficulty in tracking results from campaigns because of the lack of relevant data and analytics to gauge performance.
Somehow Facebook still hasn’t stumbled upon a model that’s proven consistently successful for marketers, or that brings in the massive revenues to match the site’s massive user base,” noted a blog post Tuesday by Forrester analysts Melissa Parrish and Nate Elliott. “At the same time, Facebook often stands directly in the way of marketers’ efforts to measure the performance of their programs.”
They conclude that the underlying problem is that Facebook so far hasn’t paid as much attention to marketing as it does to user experience. To that end, the company in February unveiled steps to upgrade its offerings, including extending Sponsored Stories ads to Facebook’s mobile properties and new services like Reach Generator to boost ad exposure. It also expanded its suite of analytics tools.
The impact of those changes, however, is still too early to ascertain.
Eyebrows were also raised last month when Facebook reported first-quarter revenue and profit figures that reflected a slowdown in growth from the prior quarter. The $1.06 billion in sales fell about 6% from the prior quarter, while net income of $205 million was down from $233 million. Facebook blamed the dropoff mainly on a seasonal decline in ad spending.
Brian Wieser, a Wall Street analyst who follows Facebook for Pivotal Research Group, lowered his valuation of Facebook following its weaker-than-expected first quarter. But he says the timing and tenor of General Motors' decision to pull out of Facebook may be more telling in terms of GM than it is about the long-term advertising efficacy of the social network.
"It reminds me of what happened when GM pulled out of the [network TV] scatter market earlier this year. It sent a signal and conveyed a willingness to walk away from media. The willingness to walk away from a media negotiation is the greatest strength a marketer can have with a media owner," he says. “And what else happens to be going on right now?"
Wieser, of course, was alluding to the TV networks' annual upfront negotiating hype, which paves the way for billions of dollars in annual TV advertising sales, of which GM is a major buyer. “I suspect the primary audience here was not Facebook, or Facebook investors. It was for GM to send a signal that it is willing to walk away from any media negotiation, and that’s a very wise negotiating strategy.”
Edmunds.com senior analyst Michelle Krebs took a similar view. She points out that what's happening with Facebook should not be a surprise, given the company's cost-cutting measures, of which the formation of new global agency Commonwealth this year is emblematic. "The big picture is that GM wants to cut ad costs; they have made that clear," noted Krebs. "They are looking to get more bang for the buck, so they are looking at everything they do to see if they are getting value from it and is it worth the money."
General Motors' Chevrolet division has been advertising heavily on digital for younger-skewing, small cars like Cruze and especially the compact Sonic, which launched pretty much entirely online last year. But Krebs said the company also doesn't need to advertise the Sonic that much because it's already selling very well.
Nevertheless, GM’s pullout from Facebook advertising will reverberate across the ad community, potentially leading other big brands to re-evaluate their spending with the social networking giant just as the company is trying to demonstrate it can deliver consistent ad revenue growth.
The loss of $10 million in ad revenue will hardly impact Facebook's projected ad revenue of $5 billion this year. But the loss of confidence in the site by one of the nation’s biggest advertisers sends a loud message to other marketers with far smaller ad budgets.
Joe Mandese and Karl Greenberg contributed to this story.