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Ahead of Facebook I.P.O., a Skeptical Madison Ave.
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Ahead of Facebook I.P.O., a Skeptical Madison Ave.

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Ahead of Facebook I.P.O., a Skeptical Madison Ave.

With Facebook, Mark Zuckerberg has created a seemingly perfect home on the Web, one where people feel comfortable chatting with friends, playing games, sharing photos and videos, listening to music and revealing the most intimate details of their lives.

The $100 billion question is whether Facebook will be a perfect home for advertisers, as well.

Facebook, the social networking giant, is on the cusp of an initial public offering that is shaping up to be a success. There has been such an investor frenzy that the company supersized its offering on Wednesday. It now plans to sell nearly 18 percent of the company to the public - up from around 14 percent - in an I.P.O. that could value the company at more than $100 billion.

Despite the overwhelming level of interest, Facebook is facing fresh concerns over its ability to attract enough advertising revenue to justify that stratospheric valuation. On Tuesday, General Motors, the third-largest advertiser in the country, shut down its Facebook budget, about $10 million, saying that those ads were simply not doing enough to sell automobiles.

For Facebook, the loss of $10 million is not a big deal. The company generated $3.7 billion of revenue last year, 85 percent from advertising.

But the loss underlines the company's need to convince a skeptical Madison Avenue that Facebook pages are the perfect vehicle for marketers and to convince eager investors that it can increase its advertising revenue, and quickly.

"It's one of the most powerful branding mechanisms in the world, but it's not an advertising mechanism," said Martin Sorrell, chief executive of WPP, the giant advertising agency.

G.M. aside, many companies remain committed to the social media platform as a way to engage and connect with consumers. Advertising executives, industry analysts and institutional investors just aren't convinced that activity will translate into huge and growing profits for Facebook. It is a concern shared by some of the company's bankers, according to people with knowledge of the matter.

Companies like Home Depot,Wells Fargo and Merck have a presence on Facebook with their own pages. But they are mainly focused on fashioning content to build brand loyalty, rather than creating targeted advertising.

Even G.M. has said it plans to keep dedicated Facebook pages, stressing that it is an important avenue for reaching car buyers. The automaker just doesn't want to pay Facebook - a decision that analysts worry other companies could make.

"My colleagues and I have spoken with several other advertisers who were already thinking of putting their dollars elsewhere," said Melissa Parrish, an analyst at Forrester. "Now that G.M. has done so in such a large and public way, many of the fence-sitters will know that they're not alone."

As with all advertising, companies want to know what they're getting for their money, and with Facebook, the answer isn't clear. While the social network collects large amounts of data on its users, Facebook is much more reluctant than Google and other online sites to share that information with advertisers.

Facebook currently allows marketers to buy audiences, say women between the ages of 18 and 35 who live in a specific neighborhood. But Facebook is essentially a walledgarden, so what users may do on the Web beyond Facebook - where they shop, what they read - isn't available for advertisers who want to home in on people's behavior. Instead, Facebook provides basic information on just how many users "like," or follow, a particular ad or page

"Facebook's a silo," said Darren Herman, the chief digital media officer at the Media Kitchen, an agency that helps clients on Facebook. "It is very hard to understand the efficacy of what a Facebook like, or fan or follow is worth."

Already, investors are putting a price on those Facebook users. At a market value of $100 billion, investors are estimating that each person with a Facebook page is worth roughly $110. But that's based on the potential profits - not what Facebook is making off them now. Last year, each Facebook user generated $4 worth of sales for the company.

If the company doesn't live up to those promises, the stock may suffer. While new investors are betting that Facebook will be the next Google, current owners of the social network are taking some of their money off the table, including DST Global, Accel Partners and Goldman Sachs.

"Over time, Facebook will be able to increase its revenue," said Mr. Sorrell of WPP. "But whether it will be able to justify its valuation, well, time will tell."

Facebook has spent years trying to court Madison Avenue.

In 2005, the advertising group was largely run out of the company's satellite New York "office," the modest Upper East Side apartment of Kevin Colleran, one of Facebook's first sales employees.

"We told advertisers it was $5,000 minimum," Mr. Colleran said in an interview earlier this year. "But, really, we would take what we could get."

As Facebook expanded beyond the college network, finding advertisers became easier. Companies were wowed by the growing number of users and the minutes people spent on the site.

But Facebook's young chief was hesitant to clutter the site with ads. Its biggest competitor, Myspace, was clogging users' profiles with loud advertisements, creating a jarring aesthetic. Mr. Zuckerberg, who has often said that Facebook was not designed to be a business, firmly told his team he would not sacrifice product for the sake of revenue.

"Mark made it clear: he said get me ads that make the experience better," Mr. Colleran, who has left the company, said.

That philosophy has helped shape its current pitch. Rather than simply providing traditional ads, the social network encourages companies to engage with users by telling them stories. Facebook believes that such interaction is less intrusive than other online ads that take over a user's screen or push down content.

Some companies are aggressively jumping onto the platform. Last year,Wal-Mart started a Facebook app that customized offers for more than 3,800 of its American stores. "A national message is often not as relevant as being able to say, we've got sunscreen in the South and we've got rubber boots in the North," Stephen Quinn, chief marketing officer for the Wal-Mart U.S. division, said at the time of the October introduction.

But not all companies are persuaded. For one, Facebook has been relatively protective of its user data, citing privacy concerns. But data is critical to creating tailored ads.

Facebook also doesn't have the full palette of advertising options. For example, companies can buy space only directly through Facebook, rather than through a network, where advertisers have more control. And Facebook limits the types of ads. While it allows companies to use video or social features, Facebook doesn't let advertisers take over its home page or dress up their ads with a lot of bells and whistles.

"Facebook doesn't have a clear enough story to tell marketers," said Ms. Parrish of Forrester.

Investors piling into Facebook will be doing so on faith. To buy the shares, they have to believe that the company will be able to milk an ever-increasing amount of revenue from all the Web site's social interactions, without alienating users with intrusive advertising or breaches of privacy.

Some analysts see evidence that Facebook is already successfully weaving ads into users' interactions, without excessive intrusion. If this approach works, the returns on such Facebook ads could be five times higher for advertisers than regular ads, said Ken Sena, an analyst at Evercore Partners. Mr. Sena said he thought that Facebook's advertising revenue could reach $14.9 billion in 2017, up from $3.2 billion last year.

Still, there are warning signs. Facebook's advertising revenue actually fell in the first quarter of this year, from the fourth quarter. And some analysts think ad revenue will grow quite a bit more slowly this year than last.

This is where comparisons with Google, which went public in 2004, become apt. On its first day of trading, Google closed at $100.34 a share, which was 69 times the company's earnings. Back then, Google's revenue and earnings were growing faster than Facebook's today.

If Facebook goes public with a $100 billion market value, it would trade at 103 times the profits it made in the 12 months through the end of March. In that case, investors aren't just saying Facebook is the next Google, they are betting it is better than the I.P.O. of Google - a lofty goal by any measure.

Ahead of Facebook I.P.O., a Skeptical Madison Ave. - Yahoo! Finance

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