Will GM hurt Facebook's IPO?

The auto giant's move raises doubts about Facebook's business model -- just days before it begins selling shares to the public.

By TheWeek.com May 16, 2012 1:56PM

General Motors (GM) announced this week that it will no longer pay Facebook to advertise on the social network, an embarrassing setback for Mark Zuckerberg and Co. in the run-up to their fanatically hyped IPO on Friday.


GM says paid ads on Facebook, which constitute the bulk of the social network's revenue, "have little impact on consumers' car purchases," says the Wall Street Journal.

The paid ads cost GM $10 million a year (it spends another $30 million creating ads and content for its own Facebook pages), which is a drop in the bucket compared to Facebook's revenue of $3.7 billion in 2011. However, GM's move could the beginning of a trend, and a warning to investors about the viability of Facebook's business model.

Will GM hurt Facebook's IPO?

Investors should be very wary: GM's decision shows that anyone buying Facebook shares "will be paying up big time for a company that may or may not find a strong business model," says Larry Dignan at CNET. Google is far better for advertisers because people use Google (GOOG) to search for products. Facebook, on the other hand, is like a park. People go there to socialize, not to buy cars, or anything else. "It remains to be seen if IPO hope today turns out to be a good investment in the future. Generally speaking, hope isn't an investment strategy." 

And Facebook still hasn't figured out social ads: Facebook is sitting on a trove of user data that advertisers are slavering over, says Peter Cohan at Forbes. But Facebook's "ham-handed efforts" to make that data accessible to advertisers is making "consumers quite unhappy," with many complaining about privacy violations. Facebook has to boost advertising and simultaneously enhance the user experience, and it's a "question whether Facebook can meet this challenge." 

C'mon. Facebook is too big to fail: With 900 million users and counting, Facebook "is going to pull in a lot of ad dollars through sheer force of gravity," says Peter Kafka at AllThingsD. The company doesn't want to be a "big, lumbering giant that attracts ad dollars without knowing what it's doing," but the truth is, Facebook will likely be able to muddle along successfully even "if it never cracks the social ad code." 


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