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Facebook's Ad Revenue In Jeopardy After GM Exit

 May 17, 2012 09:51 AM
 


(By Mani) Facebook seems to have hit a new roadblock before its IPO as automaker General Motors Co. (NYSE:GM) has pulled its ads from the social networking site. This should be a cause of concern for Facebook, which generates a significant share (82%) of its revenue from third party ads.

GM, the third largest advertiser in the U.S. after P&G (NYSE:PG) and AT&T (NYSE:T), has shelled out nearly $10 million out of its $1.78 billion spent on advertisements last year on Facebook advertising.

[Related -AT&T Inc. (T) Q4 Earnings Preview: Direction of Surprise Dictates January EPS Price Response]

GM says its paid ads on the Facebook have little impact on consumers' car purchases, according to a report in the Wall Street Journal. According to Kantar Media, GM cut its 2011 outlays by 16.1 percent as GM dealers have been bearing a larger share of the overall marketing effort after factory support has been trimmed.

However, the pullout of GM poses questions over the revenue model of Facebook and raises skepticism whether it can sustain the 80 percent plus revenue growth from ads. Though, social network advertising on Facebook and Twitter should become a lucrative industry, they may have to prove their value to advertisers in terms of return on investment.  

[Related -Google Inc (GOOG) Q4 Earnings Preview: What To Watch?]

For Facebook, the $10 million payment from GM accounts for only a small share of its total 2011 revenue of $3.7 billion, the issue will become serious if other advertisers follow suit with the same opinion. GM would continue its online presence on Facebook, but it won't give revenues for the site.

If more paid advertisers opt out of Facebook, then it would significantly hurt its topline. The revenue contribution from ads has been declining. In 2009, 2010, and 2011 and the first quarter of 2011 and 2012, advertising accounted for 98 percent, 95 percent, 85 percent, 87 percent, and 82 percent, respectively, of its revenue. For the first quarter, Facebook said ad revenue was down 7.5 percent sequentially.

Meanwhile, the GM pullout came a day after Facebook hiked its initial public offering price range to $34 to $38, from $28 to $35, thereby allowing it to raise as much as $12.8 billion in the biggest ever Internet IPO after Google, Inc. (NASDAQ:GOOG), which raised $1.9 billion at a valuation of $23 billion in 2004.

Facebook, the world's largest social networking site with 901 million monthly active users, is expected to price shares on May 17 and begin trading on May 18 on Nasdaq under the symbol "FB."

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