Facebook (FB) Plea: Ads Do Work

Facebook Inc (NASDAQ:FB) is the subject , and the part sponsor, of a new study which reflects well on the site’s advertising network as the company tries to reposition itself after the disaster of its initial public offering. The study was conducted by comScore and paid for partly by Facebook.

In the days leading up to the firm’s IPO, General Motors Company (NYSE:GM) pulled advertising from the site claiming that it had not been effective. That move severely injured investor confidence heading into the public offering and may have caused some of the worries that lowered the price.

The new study, released just after the IPO’s restricted speech period, suggests that advertising on the site is in fact effective. The research is an attempt by Facebook to get the firm’s ad business back on track and realign itself in the eyes of investors. The firm’s value has been in doubt since long before the public offering.

One of the case studies in the report concentrated on Starbucks. It found that within three weeks of seeing an advertisement for the coffee house chain on Facebook, fans of the brand and their friends increased their purchases by around 38 percent. For Target that figure was around 21 percent.

Facebook’s ability to reach users through advertising is just a small part of the problem facing the company. As the world moves to mobile based computing the social network is failing to find a successful way to generate revenue from that without breaking the user experience.

User experience is absolutely key to Facebook’s effort to expand and keep its current users. If that experience devolves it could precipitate the departure of many from the site which stakes almost the entirety of its value on its huge user base and the amount of time the users stay engaged for.

Another issue facing the company, assuming the first two solved, is whether they will be able to increase the value of their advertising to a level where a valuation of $100 billion of above is justified. Facebook is, at least right now, an advertising company. Ad revenue is its lifeblood and that is what will drive growth.

On the other hand, if rumours of a speculative smart phone release are true, the company may have other goals for its future and other ways to generate revenue outside of the advertising sphere. Social gaming, through the likes of Zynga Inc. (NASDAQ:ZNGA) already generates about 14% of the firm’s revenue.

Growth in offering Facebook as a platform for applications and taking a cut off of the top of purchases looks like a goal for Facebook at the moment, but it is not one that analysts have followed too closely. Other than Zynga very few of these applications seem to offer the kind of Revenue Facebook is looking for.

Facebook’s problems are huge and they will not be solved by today’s report. If anything such a report being released at this time does less to reassure investors of the company’s solidity than it does to reiterate the firm’s weaknesses.