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Facebook's Can't-Win Advertising Strategy

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The pressure is on to "monetize" its huge membership, but its members balk at its every effort. And for good reason.

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Have you heard about the latest blowup over a Facebook (NASDAQ:FB) money-making scheme? It seems that the company is offering some users preferential placement of posts on the news feeds of other people for a $7 fee. Or, taking it just a step further, Facebook may be burying the posts of those users, unless and until they pay $7.

Both options have only been inferred by users from their actual Facebook experiences. Facebook isn't about to give away proprietary information, and/or enrage its users even more than usual, by describing how it prioritizes the posts its users see.

In truth, this latest move is relevant mostly to commercial users, who are eager to get their marketing messages seen by the largest possible audience. They are even more eager to get those messages delivered for absolutely free, as they have been doing since Facebook was founded.

Facebook presumably did not purposefully create a free advertising vehicle (that is, the standard posting function) that's more effective than its paid vehicle (display advertising).

But that's what it's got. And, based on its efforts so far, there is no way that Facebook can deliver advertising that's effective for sponsors and yet does not alienate its user base, which is immense but not necessarily loyal to a fault.

In fact, every time Facebook's big thinkers step outside the box on advertising, they step in it.. The company's great strength, in the competition for online advertising dollars, is its ability to sort and sift its vast database of personal information on its users, gathered from their profiles, their posts, their shares, and their likes.

The problem is, Facebook's users have a natural aversion to having their every trivial comment and keystroke collected, stored, distributed, and even, on occasion, misinterpreted.

Here's an example: Facebook appears to be selling your "likes," to appear under your name on the news feeds of your friends because you have previously clicked the "like" button on a link in that site. For example, I "liked" a news story that appeared recently on CNN, because I thought some of my friends would find it equally interesting. Days afterwards, my Facebook news feed proclaimed that I "liked" the following CNN headline: "Burt Reynolds Hospitalized With Pneumonia." Excuse me, friends, I've got nothing against poor Mr. Reynolds, though his current health is not of pressing interest to me, and I never even clicked on that story anyway.

Again, the above is an inference based on actual Facebook usage, not on a company announcement. But I can think of no other possible link between me and Burt Reynolds.

If you think that's relevant only to your posts related to news sites, consider how much you'll appreciate it when advertisers start attributing to you endorsements for random products available on eBay (NASDAQ:EBAY), or maybe some medical procedure described in horrible detail on Health.com. And then they'll store those "likes" forever, for access by total strangers, prospective employers, and your mom.

Part of the problem is that Facebook and its advertisers appear to be approaching and defining each opportunity in the crudest way possible. You can see this by taking a look at the right side of the Facebook screen, where the (properly-labeled) display ads appear, supposedly personalized to each user. At the moment, my top page has seven ads, and five of them are for the same celebrity diet scam. That's must be because I'm an American female, since I can comfortably swear I've never posted a hint about my weight on Facebook.

So, Facebook presumably has failed to find a way to sell advertising targeted at any of the valuable little demographic sub-groups that my activity on the site reveals that I belong to: people who follow political news closely, who live with cats, watch Game of Thrones, like to go to warm places during the winter, have strong connections to New York City, and so forth.

This means that Facebook is offering its advertisers less value than they could get with judicious purchases in traditional media. That would be very bad news even if there weren't another website out there that had the same advantages as Facebook: vast user reach, daily usage, and the ability to collect, sort, and sell information related to actual usage.

And that is Google (NASDAQ:GOOG). Of course, Google has gotten slapped around, too, for stepping outside the box on advertising practices. But its relative success in bringing in advertising dollars is attributable to its core mission of search, and the way its search works.

It's the immediacy that counts. Google could rake in the dollars without ever storing any of your searches or using any personal information about you. Each search you enter expresses a current interest, and Google responds with related information and actionable advertising offers, properly separated so you know which is which.

It's not clear why Facebook has been unable to pull that one off.

Not that Google is content with its core competency, either. So, it remains to be seen whether Google or Facebook will be first to find a way out of the advertising box without frustrating or offending their billions of customers around the world.
No positions in stocks mentioned.
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