Why Facebook’s losing advertising dollars

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AP

Facebook is the preferred network, used by 71 percent of online adults, or 57 percent of all American adults, according to Pew researchers.

San Francisco - Four out of five Facebook users have never bought a product or service as a result of advertising or comments on the social network site, a Reuters/Ipsos poll shows, the latest sign that much more needs to be done to turn its 900 million customer base into advertising dollars.

The online poll also found that 34 percent of Facebook users surveyed were spending less time on the website than six months ago, whereas only 20 percent were spending more.

The findings underscore investors' worries about Facebook's money-making abilities that have pushed the stock down 29 percent since its initial public offering last month, reducing its market value by $30 billion to roughly $74 billion.

About 44 percent of respondents said the market debut, seen by investors as troubled, has made them less favorable toward Facebook, according to the survey. In the May 31-June 4 poll of 1,032 Americans, 21 percent said they had no Facebook account.

Facebook's 900 million users make it among the most popular online destinations, challenging entrenched Internet players such as Google Inc and Yahoo Inc. Not everyone is convinced the company has figured out how to translate that popularity into a business that can justify its lofty valuation.

Shares of Facebook closed Monday's regular trading session down three percent at $26.90.

While the survey did not ask how other forms of advertising affected purchasing behaviour, a February study by research firm eMarketer suggested Facebook fared worse than email or direct-mail marketing in terms of influencing consumers' decisions.

“It shows that Facebook has work to do in terms of making its advertising more effective and more relevant to people,” eMarketer analyst Debra Williamson said.

Those concerns were exacerbated last month when General Motor, the third largest advertiser in the United States, said it would stop paid advertising on Facebook.

Facebook declined to comment in detail on the survey, but referred to case studies of companies such as Nutella, which found that a 15 percent increase in sales was attributable to Facebook, and restaurant chain Applebee's, whose Facebook ads delivered a threefold return on investment.

Measuring the effectiveness of advertising can be tricky, particularly for brand marketing in which the goal is to influence future purchases rather than generate immediate sales.

The success of an ad campaign must be considered in relation to the product, said Steve Hasker, president of Global Media Products and Advertiser Solutions at Nielsen.

“If you are advertising Porsche motor cars and you can get 20 percent of people to make a purchase that's an astonishingly high conversion rate,” said Hasker.

“If you are selling instant noodles, maybe it's not,” he

About two out of five people polled by Reuters and Ipsos Public Affairs said they used Facebook every day. Nearly half of the Facebook users polled spent about the same amount of time on the social network as six months ago.

Keeping users coming back is crucial for all social media services, said Gartner analyst Ray Valdes.

“Facebook continuously has the challenge of Facebook fatigue, of the novelty factor wearing off, and therefore they have to introduce new kinds of interaction,” said Valdes, citing new features such as the “Timeline” interface and the planned $1 billion acquisition of mobile photo-sharing app Instagram.

The survey provides a look at the trends considered vital to Facebook's future at a time when the company has faced a harsh reception on Wall Street.

Facebook's $16 billion IPO, one the world's largest, made the US company founded by Mark Zuckerberg the first to debut on markets with a capitalization of more than $100 billion.

Its coming out-party, which culminated years of breakneck growth for the social and business phenomenon, was marred by trading glitches on the Nasdaq exchange. A decision to call some financial analysts ahead of the IPO and caution them about weakness in its business during the second quarter has triggered several lawsuits against Facebook and its underwriters.

Forty-six percent of survey respondents said the Facebook IPO had made them less favorable towards investing in the stock market in general.

While Facebook generated $3.7 billion in revenue last year, mostly from ads on its website, sales growth is slowing.

Consumers' increasing use of smartphones to access Facebook has been a drag on the company's revenue. It offers only limited advertising on the mobile version of its site and analysts say the company has yet to figure out the ideal way to make money from mobile users.

Facebook competes for online ads with Google, the world's No. 1 web search engine, which generated roughly $38 billion in revenue last year. Google's search ads, which appear alongside the company's search results, are considered among the most effective means of marketing.

Facebook is still perfecting the effectiveness of its ads, said Gartner's Valdes. But he said he was surprised that the comments posted on the website from Facebook users' friends were also only responsible for 20 percent of users making a purchase.

“Comments and recommendations from friends on Facebook do carry a lot of weight, so I'm surprised by the number,” he said.

The most frequent Facebook users are aged 18 to 34, according to the survey, with 60 percent of that group being daily users. Among people aged 55 years and above, 29 percent said they were daily users.

Of the 34 percent spending less time on the social network, their chief reason was that the site was “boring,” “not relevant” or “not useful”. Privacy concerns ranked third.

The survey has a “credibility interval” of plus or minus 3.5 percentage points. - Reuters

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