Is Facebook Its Own Worst Enemy?

General Motors (NYSE:GM) notoriously dumped Facebook (NASDAQ:FB) and its advertising model last month, just before the latter’s initial public offering. But according to higher-ups at GM and Facebook, the automaker’s team asked whether it was possible to run bigger, higher-impact (and probably more costly) ad units on the site before deciding to pull out completely. But the stalwart Facebook wanted to keep it classy.

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Instead of running sponsored stories, which look like Facebook posts, or smaller units on the right side of the pages, GM asked if it could take over a whole page. Facebook’s (NASDAQ:FB) answer was a resounding ‘no.’ And as we all know, General Motors didn’t take the rejection well, abandoning Facebook’s nearly one-billion-strong audience altogether.

If the rebuff was enough to cause the country’s third-largest advertiser to yank its ads from the social network, it stands to reason others may soon follow suit, right? Users may be glad that Facebook has shown restraint, trying to balance its dual existence as both a commercial platform and a social platform. But as its shares continue to sell off more than a week after its IPO, one has to question whether that business model is bound to change, or ought to.

Until now, one could argue that Facebook has put user experience first, with advertisers forced to take a back seat, accepting whatever exposure they could get on the popular site. Of course, that meant Facebook (NASDAQ:FB) had to turn down advertisers. However, that’s also at least part of how Facebook grew its user base to 901 million around the world. Now, the sun never sets on the Facebook empire, but in the future, Mark Zuckerberg may be saddled with the next MySpace. If you’re under the age of 25, you might be asking yourself right now, What is MySpace? Zuckerberg’s goal should be, first and foremost, to prevent future generations from asking the same question about his social network, which is still rather young, though pushing middle age in Internet years.

Turning down advertisers may have worked for Facebook, the private company, but Facebook, the newly-public company, has shareholders to answer to. And while it may provide advertisers with one of the largest audiences of any Web property, Facebook doesn’t have all the numbers on its side. In fact, Google (NASDAQ:GOOG) ads have been shown to be 8 times more effective than Facebook ads, in terms of their click rates.

Zuckerberg said it himself in his IPO filing: “We don’t build services to make money; we make money to build better services.” And since Facebook users don’t pay for those better services, the business model is noticeably flawed.

Facebook’s relatively new socially-enhanced ads may be the solution, but so far they’re largely untested, and clearly aren’t enough to hook some advertisers. Carolyn Everson, Facebook’s VP-Global Marketing Solutions, said she doesn’t see anything like a traditional home-page takeover in Facebook’s future. Facebook’s value will likely remain in its social ads, where brands get their fans to spread the word among friends, and pay to extend the reach of those endorsements.

“Marketers that don’t quite get that those are the two fundamental pillars that make us different often will refer back to the formats that they’ve been used to over the last couple decades,” Everson said.

Facebook tries to integrate ads into the site so they feel native rather than stand out, a counter-intuitive move for most marketers. “We have 900+ million people on the platform and our job is to make the advertising on the platform as good and as compelling as content from [users’] parents or their friends or their boyfriends or girlfriends,” said Everson. “So when a marketer asks for something like that, that’s just not what works on Facebook, so we would say no.”

Still, recognizing demand for something different, Facebook in February unveiled logout ads, which can be flashy and creative and even video-enabled, but aren’t disruptive to users, as they appear only upon exiting the platform. Unfortunately, most people rarely, if ever, log out of Facebook, and those who do often do so because they’re accessing the site from public computers — not necessarily the audience marketers are trying to reach.

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