One of the great "paradigms" of the New Normal tech bubble that supposedly differentiated it from dot com bubble 1.0 was that this time it was different, at least when it came to advertising revenues. The mantra went that unlike traditional web-based banner advertising which has been in secular decline over the past decade, social media ad spending - which the bulk of new tech company stalwarts swear is the source of virtually unlimited upside growth - was far more engaging, and generated far greater returns and better results for those spending billions in ad bucks on the new "social-networked" generation. Sadly, this time was not different after all, and this "paradigm" has also turned out to be one big pipe dream.
According to the WSJ, citing Gallup, "62% of the more than 18,000 U.S. consumers it polled said social media had no influence on their buying decisions. Another 30% said it had some influence. U.S. companies spent $5.1 billion on social-media advertising in 2013, but Gallup says "consumers are highly adept at tuning out brand-related Facebook and Twitter content." (Gallup's survey was conducted via the Web and mail from December 2012 to January 2013. The survey has a margin of error of plus or minus 1 percentage point.)
In a study last year, Nielsen Holdings NV found that global consumers trusted ads on television, print, radio, billboards and movie trailers more than social-media ads.
Gallup says brands assumed incorrectly that consumers would welcome them into their social lives. Then they delivered a hard sell that turned off many people.
More recently, changes in how Facebook manages users' news feeds have hindered brands' ability to reach their fans. Rather than a largely chronological stream, Facebook now manages the news feed to feature items it thinks users will want to see.
The result: Brands reached 6.5% of their fans with Facebook posts in March, down from 16% in February 2012, according to EdgeRank Checker, a social-media analytics firm recently acquired by Socialbakers.
One case study:
Indian Road Cafe in New York City estimates it spent about $5,000 on Facebook ads, and its page now has about 13,000 fans. "But the return is really disappointing," says co-owner Jason Minter. "Unless you spend to boost a post, you only reach 300 to 400 people. I've certainly noticed the loss of organic reach. You spend all this time, and unfortunately, the return is not there." Mr. Minter says the restaurant still uses Facebook, but in a more targeted way, and is looking to a new website and other digital marketing approaches rather than building up the Facebook audience.
In May 2013, Ritz-Carlton Hotel Co. bought ads to promote its brand page on Facebook. After a few days, unhappy executives halted the campaign—but not because they weren't gaining enough fans. Rather, they were gaining too many, too fast "We were fearful our engagement and connection with our community was dropping" as the fan base grew, says Allison Sitch, Ritz-Carlton's vice president of global public relations.
Today, the hotel operator has about 498,000 Facebook fans; some rivals have several times as many. Rather than try to keep pace, Ritz-Carlton spends time analyzing its social-media conversations, to see what guests like and don't like. It also reaches out to people who have never stayed at its hotels and express concern about the cost.
Ritz-Carlton illustrates a shift in corporate social-media strategies. After years of chasing Facebook fans and Twitter followers, many companies now stress quality over quantity. They are tracking mentions of their brand, then using the information to help the business.
"Quality over Quantity" means the days of blindly scrambling to gain followers no matter the cost, are over.
"Fans and follower counts are over. Now it's about what is social doing for you and real business objectives," says Jan Rezab, chief executive of Socialbakers AS, a social-media metrics company based in Prague.
When many companies joined Facebook in the late 2000s, they used it as another brand website where they provided links, contact information and monitored consumer gripes. Then, they got caught up in the numbers game, trying to rack up raw masses of fans and followers, believing they were building a solid marketing channel. But that often wasn't the case.
There is the engagement issue. But the main reason behind the growing disappointment with social media advertising is what we explained back in January in "It's A Click Farm World: 1 Million Followers Cost $600 And The State Department Buys 2 Million Facebook Likes" - in short, pervasive click fraud and fake followers, the scourge of any advertising IRR analysis.
Another reason companies are looking beyond fan numbers is that the numbers are easily gamed. Researchers say many fans are fake, or automated, accounts designed to inflate numbers.
Italian security researcher Andrea Stroppa says he found a new breed of sites offering Facebook fans or Twitter followers for pennies. In experiments, Mr. Stroppa paid 42 cents for 700 retweets and seven cents for 100 likes on a Facebook post.
For now, however, companies stumped for revenue leads are still using social media: "while companies are adjusting their social-media strategies, they continue to advertise on Facebook. First-quarter net income nearly tripled at the social-network on a 72% increase in revenue."
In other words the social-media ad spending model still works for some, like the Facebooks of the world: those who pocket the ad spend. As for the companies who do the actual spending - not so much.
Still, with the deteriorating finances of the US consumer directly impacting the discretionary spending vertical, one thing is certain: as companies become increasingly more cash strapped their ad budgets will dwindle, which in turn will impact how much money is allotted to the "New advertising paradigm", and sooner or later ad purchasing managers will revert to old and familiar forms of advertising using legacy media.
What this means for the generation of social media companies, still incubate in private at stratospheric valuations or going public assuming virtually unlimited (ad revenue) growth is still unclear, but is hardly optimistic. Because once the ad spending plateaus and reverts to a downward trendline as seen in virtually all other ad models, the current infatuation with "eyeballs" will end with a bang, as it did over a decade ago. Because while everything else changes, it never is diferent this time.