Can Facebook, a mere 8 years old on the calendar but a middle-ager in Internet time, continue to create new products that will become effective revenue-generators in the future?
That's exactly what nervous investors are wondering, especially after seeing the company's first quarterly earnings report last week and watching their stock price zoom downhill like a kid in a water slide. The company's stock, which started selling publicly on May 18 at $38, closed July 30 at $23.15 and has dropped 12 percent in the last couple of sessions since the Menlo Park, Calif.-based company's first earnings report on July 26.
One of these new products, sponsored stories -- which resemble regular news or magazine-type articles but are placed by advertisers -- aren't new at all to the ad business but are indeed a new addition to Facebook's catalog.
Co-founder and CEO Mark Zuckerberg says he has no doubt these new-gen ads will work. So does Chief Operating Officer Sheryl Sandberg. A fair number of industry analysts think the same thing, but not everybody is convinced.
Last week, during his first earnings conference call to analysts, Zuckerberg said these ads are already generating about $1 million per day in revenue in limited testing. With that kind of potential income, it's no wonder Facebook is planning to add these to daily streams on members' news feeds and status updates. Who knows how many Facebook users will see each day? Dozens, or perhaps many more.
How Sponsored Stories Work
Sponsored stories look similar to regular news feed articles you get from friends, but they highlight a business or person "so there's a better chance you'll see them," Zuckerberg said. So if Justin Bieber, for example, wanted to get more visibility -- as if he needed any more -- you might see a photo of him and his name in boldface, for example, in your news feed. Or you might see a link to tickets for his next concert in your area.
The longer-term strategy of these sponsored stories is that they give Facebook a new way to serve up ads to users with smartphones and tablet PCs, where regular display ads don't work as well. It's well known that Facebook needs to move beyond Web pages on desktops and into these smaller devices.
On its quarterly earnings call, the company reported that 543 million of its monthly users now use mobile devices -- a whopping 67 percent increase from a year ago. Several thousand Facebook users just moved to smartphones while you are reading this sentence.
"The dilemma for Facebook now is the more successful sponsored stories are in terms of driving their revenues, the more intrusive they will be into the user experience," Shane Ginsberg, senior vice president of Corporate Development for San Francisco-based digital marketing agency Organic, told the San Francisco Chronicle.
Ginsberg's agency works with large-scale advertisers such as Procter & Gamble, Pepsi and Wal-mart. He said he has seen good results so far with limited numbers of sponsored stories. But it's way too early to tell how effective they might be as they grow in number.
One must also take into account that these are not being published on social networks and mobile devices, where users generally have shorter attention spans.
"The more successful this gets, especially on mobile platforms, the worse it might become for users," Ginsberg said. "It's really hard (for Facebook), because this is the one area they can credibly claim they have a mobile story. And that's central to Facebook's survival."
Company Had Better Be Extra Careful in Presentation
The view from here is this: Facebook had better be extra careful in how these are presented, or they will turn off users completely.
Look what happened to MySpace, which was just as hot as Facebook at one time and has been languishing for five or six years. Sponsored items cluttered up the pages. Design guidelines virtually disappeared, ads started popping up everywhere, and the sites looked junky. People left in droves when the cleaner, neater Facebook showed up.
These things tend to be cyclical. Facebook needs to learn from the past.
Here are three key items Facebook ought to consider before it rolls out increased numbers of sponsored stories:
Data Point 1: People generally don't like to encounter ads disguised as other things, especially when they look like truly informational articles from an objective source. That will simply make users upset; this is not usually a reaction that will gain friends and influence people.
Data Point 2: If these sponsored stories become too ubiquitous, and there's always going to be that danger, users will gloss right over them -- sort of like the logos on NASCAR race cars. When was the last time you bought a product because of a logo you saw on Kyle Busch's car?
Data Point 3: If there aren't legitimately useful and interesting sponsored items mixed in, you can bet that delete buttons will be working overtime.
Chris Preimesberger is Editor of Features and Analysis at eWEEK. Twitter: @editingwhiz