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A year after IPO, Facebook aims to be ad colossus

Caption
(Zef Nikolla)
FILE - In this May 18, 2012, file photo, provided by Facebook, Facebook founder, Chairman and CEO Mark Zuckerberg, center, rings the opening bell of the Nasdaq stock market, from Facebook headquarters in Menlo Park, Calif. Amid the hype and excitement surrounding Facebook's initial public offering, there were looming doubts. Potential investors wondered whether the social network could continue growing its advertising revenue without alienating users. One year later, much has changed at Facebook in a year, including the addition of mobile advertisements, the launch of a search feature and the unveiling of a branded smartphone. (AP Photo/Nasdaq via Facebook, Zef Nikolla, File)

NEW YORK – It was supposed to be our IPO, the people's public offering.

Facebook, the brainchild of a young CEO who sauntered into Wall Street meetings in a hoodie, was going to be bigger than Amazon, bigger than McDonald's, bigger than Coca-Cola. And it was all made possible by our friendships, photos and family ties.

Then came the IPO, and it flopped. Facebook's stock finished its first day of trading just 23 cents higher than its $38 IPO price. It hasn't been that high since.

Even amid the hype and excitement surrounding Facebook's May 18 stock market debut a year ago, there were looming doubts. Investors wondered whether the social network could increase advertising revenue without alienating users, especially those using smartphones and tablet computers.

The worries intensified just days before the IPO when General Motors said it would stop paying for advertisements on the site. The symbolic exit cast a shroud over Facebook that still exists. Facebook's market value is $63 billion, some two-thirds of what it was the morning it first began trading. At around $27 per share, the company's stock is down roughly 30 percent from its IPO price. Meanwhile, the Standard & Poor's 500 index is up 27 percent over the same period.

Despite its disappointing stock market performance, the company has delivered strong financial results. Net income increased 7 percent to $219 million in the most recent quarter, compared with the previous year, and revenue was up 38 percent to $1.46 billion.

The world's biggest online social network has also kept growing to 1.1 billion users. Some 665 million people check in every day to share photos, comment on news articles and play games. Millions of people around the world who don't own a computer use Facebook, in Malawi, Malaysia and Martinique.

And much has changed at Facebook in a year. The company's executives and engineers have quietly addressed the very doubts that dogged the company for so long. Facebook began showing mobile advertisements for the first time just after the IPO. It launched a search feature in January and unveiled a branded Facebook smartphone in April. The company also introduced ways for advertisers to gauge the effectiveness of their ads.

Even GM has returned as a paying advertiser.

Now, Facebook is looking to its next challenge: convincing big brand-name consumer companies that advertisements on a social network are as important — and as effective — as television spots.

"We aspire to have ads, to show ads that improve the content experience over time," Facebook CEO Mark Zuckerberg told analysts recently. "And if we continue making progress on this, then one day we can get there."

To achieve those aims, the company has rolled out tools to help advertisers target their messages more precisely than they can in print or on television. Companies can single out 18- to 24-year-old male Facebook users who are likely to buy a car in the next six months. They can target 30-year-old women who are researching Caribbean getaways.

Analytic tools like these weren't available a year ago. But last fall Facebook hired several companies that collect and analyze data related to people's online and offline behavior. Facebook's advertisers can now assess whether a Crest ad you saw on Facebook likely led you to buy of a tube of toothpaste in the drugstore. The services take what Facebook knows about you and what ads you saw and combine this with the information retailers have about you and what you've purchased through loyalty cards and the like.

Advertisers are also making use of Facebook's partnership with audience measurement firm Nielsen Co. Nielsen introduced a tool last fall that helps marketers discover "not only who saw their ad online and who saw their ad on TV, but also how these audiences match up," says David Wong, vice president at product leadership at Nielsen.

Sean Bruich, Facebook's head of measurement platforms and standards, believes the new tools are paying off.

"What we can see conclusively a year after the IPO is that ads on Facebook really do help drive people into the store and help them make purchasing decisions, help influence their purchasing decisions," he says.

A recent Nielsen analysis found that consumers are 55 percent more likely to recall "social ads" than traditional online ads.

So powerful is Facebook's new analytic arsenal that privacy advocates are growing concerned about the potential intrusiveness of merging consumers' online and offline experiences.

People "are getting served ads based on things they didn't put on Facebook and maybe wouldn't be comfortable putting on Facebook," says Rainey Reitman, activism director at the Electronic Frontier Foundation, a nonprofit civil-liberties firm. Facebook says mechanisms are in place to protect privacy.

"We've never had anything like Facebook," Reitman says. "We've never had an entity that was able to collect so much information on so much of the world's population, ever."

Advertisers aren't complaining.

"Anywhere that more than a billion people spend time with their friends each month is extremely valuable to us," says Brad Ruffkess, connection strategist at Coca-Cola.

At Procter and Gamble, the world's biggest advertiser, "we saw almost from the start that social media is the world's largest focus group," says Marc Pritchard, the company's global brand building officer.

Both companies are important advertisers on Facebook and members of the company's client council, a group of more than a dozen brands and ad agencies that have met regularly with Facebook executives since 2011 to talk about advertising and marketing on the site. Other members include Unilever, AT&T, Walmart and GroupM North America, a subsidiary of advertising agency giant WPP.

Still, some advertisers remain skeptical. Ryan Holiday, director of marketing at American Apparel, is critical of Facebook's "sponsored stories." These are messages from marketers that are interwoven into users' news feeds. He says the clothing company spends less than 10 percent of its online advertising budget with Facebook.

One thing is increasingly clear: The future belongs to mobile advertising. And just a year ago, Facebook warned investors it was behind in capturing this market. In response, Facebook retrained engineers and rebuilt its mobile applications, which users complained were clunky. Now, there's an explosion in the number of ads shoehorned in between status updates and cat photos.

"The transition to mobile happened even faster than we believed," says Carolyn Everson, vice president of global marketing solutions at Facebook.

In the first three months of 2013, Facebook generated $375 million in revenue from mobile ads, about 30 percent of its total ad revenue. That's impressive given that Facebook had no mobile ads at all just a year ago.

And there's room to grow. Research firm eMarketer estimates that U.S. mobile advertising spending will grow to $7.29 billion this year, up fivefold from 2011. Facebook is expected to capture some 13 percent of the market, a distant second behind Google at nearly 55 percent, according to eMarketer. By 2015, the mobile ad market is expected to hit $16.2 billion.

Facebook's stronger grasp of mobile advertising helped get General Motors back.

"Mobile was something GM was particularly passionate about," says Everson, who joined Facebook two years ago from Microsoft Corp., where she headed global ad sales.

Everson says she sees Facebook as a future advertising empire. The goal is to help companies achieve so-called cross-platform marketing and target people with ads wherever they might be — in front of smartphones, tablets or TV sets.

"A lot of people might argue that TV is the first screen and mobile is the companion screen," she says. Her take: Mobile is now the first screen. And Facebook's hope is that advertisers will soon see it this way, too.

"Your customer is walking around with the most personal device they've ever had every single day, checking it 12 to, you know, more than 24 times a day depending on the market," Everson says. "This is a mass medium."

At the end of last year, 87 percent of Americans owned a cellphone and nearly half owned a smartphone, according to the Pew Internet & American Life Project. Worldwide, research firm Gartner puts the size of the mobile phone market at 4.4 billion, enough to give one phone to nearly two-thirds of the world's population.

Of course, television still accounts for the biggest slice of worldwide ad spending, and nearly 96 percent of American households own a TV set. ZenithOptimedia, a forecaster owned by the ad agency Publicis Groupe SA, says television accounted for 40 percent of worldwide ad spending, compared with the Internet's share of 18 percent. By 2015, the Internet is expected to grow its share to more than 23 percent, but largely at the expense of newspapers and magazines. TV is expected to hold steady.

"On any given day in the U.S. alone, you can reach 100 million people on mobile," Everson says. "Those numbers are not seen across any TV or print opportunity. I think it's going to take hold, this message."

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