• by Catharine P. Taylor , April 20, 2012

So, today I’m trying to figure out Facebook.

Not about whether I should invest in it when it goes public (I won’t have the money), but about what the numbers on whether to advertise on it -- or not -- really mean.

On the one hand, TBG Digital’s quarterly Facebook Advertising Report, which came out earlier this week, notes that average CPMs on the site increased by 41% in the last year. In the U.S., this figure was up by an impressive 11% in the last quarter. That figure is especially so, when, as TBG Digital CEO Simon Mansell told The Evening Standard: “[Facebook] has grown the number of ads per page to seven, which you would naturally expect to actually deflate prices.” The overall cost per click on Facebook has increased by 23% in the last quarter.

(Fascinating side note: in evidence that a high tide lifts all boats, the study also noted that the click-through rates to Facebook’s news partners increased by 196% during a three-month period.) 

Oh, but let’s get back to that other hand. Engagement rates of ads, as measured by click-through rates, have declined in the U.S. by 8% since the fourth quarter of last year. Engagement goes down, prices go up. Why?

According to TBG, this may be partially because of said increase in ads per page. But let’s look a little more closely. The obvious math is that when you take what used to be a once-in-four choice and make it one-in-seven, it alters the foundational economics of how Facebook advertising works. Click-through rates would have to go down unless there was an ad creative breakthrough the likes of which the world has never seen. The beauty of this shift is that if you’re measuring impressions instead of click-through rates, impressions skyrocket. Still, the increase in prices on Facebook mainly seems to reflect a marketplace that may not have caught up with  the reality of low engagement rates.

The decline in engagement is backed up by a presentation that social media thinker Augustine Fou posted on Slideshare last week. Provocatively titled “Facebook Ad Scam CPMs Are for Suckers,” it says that Facebook engagement metrics have been declining for some time. Per Compete. visits per person  have declined 34% over the last two years and page views have dropped 54% during the same time frame.

This has led effective click-through rates, he says, to “a rounding error to zero” of .03%.

All these statistics are beginning to remind me of my high school economics teacher, who used to remind the class: “You can make a statistic say anything you want.”

What all this says to me is that Facebook has reached the natural limit of ads it can squeeze into the righthand column, which are the units both TBG and Fou focused on in their analysis. No matter which one is doing the talking, people’s interest level in these ads – to the extent there ever was much – has reached its relatively low ceiling.

Which should make you wonder about the future of Facebook. It’s kind of obvious; Facebook itself already laid this future out a few months ago.

The future is in marketing as part of the news feed. For advertisers, this may be leveraged, in its smartest incarnation, as creating content that users are compelled to share for free, as it always has been with the best social marketing.

For Facebook it’s a somewhat different spin on the same general concept, one in which money flows in Facebook’s direction. It all hinges on paid ads to fans being incorporated into the news feed, with those fans, or so Facebook hopes, then sharing them for free, after the money has already changed hands.

This is also why you see Facebook hiring ad creatives. At a recent conference, Facebook VP-Global Marketing Solutions Carolyn Everson said the company had been doing this because, “Creatives like talking to creatives. We need enough people at Facebook who can sit across the table from a creative leader and engage in a conversation about what the possibilities are."

It’s true that when they aren’t stabbing each other in the back (joke!), creatives do like to talk to each other. But Facebook also needs the ad industry to make its inventory, wherever it resides on a page, more interesting.

Its future revenues depend on it.