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Facebook Ignores Research, Goes All-In With Targeted Ads

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Facebook (NASDAQ: FB  ) is the darling of social media, but it's been a bit of a disappointment to investors. The company is making big strides with its mobile advertising strategy lately, but Facebook's ever-increasing targeted ads may not be all they're cracked up to be.

Like it or not
Pew Research recently reported that 68% of online users don’t like online-targeted ads because they don't want their browsing history tracked. But at the end of February, Facebook partnered with four data collection companies to gather information on Facebook users' online habits for targeted ad campaigns. Acxiom (NASDAQ: ACXM  ) , Datalogix, Epsilon, and BlueKai now provide Facebook with users' browsing history, loyalty card purchases, spending habits -- even court records and government documents. Facebook then uses this information to help advertisers target Facebook users that match very specific criteria.

For advertisers, the surface benefit is pretty obvious. Companies and brands can display ads to specific groups of people already interested in their products. The big question: Does target advertising really work?

To click or not to click
At the World Wide Web Conference last year, an employee from Yahoo! and an economics professor from Stanford University presented a study (link opens PDF) on targeted advertisement effectiveness. They found that targeted ads may cause more conversions for less money than a non-targeted ad, but said that conversions on targeted ads don't paint the entire picture.

Here's what they wrote in the concluding paragraph (emphasis mine):

Advertisers are seeking more and more to target their ads to the segments most likely to convert as a result of the advertising; however, this strategy may not be cost effective as this segment is likely to convert in the absence of any advertising. Our results indicate that more sophisticated targeting algorithms might not gain, and might even harm, the advertiser as those seeing the ad would convert in the absence of advertising.

The study suggests that if advertisers target those that are likely to convert on a targeted ad, then the advertisers may get the conversations they want, but the ad may have been unnecessary in the first place.

For Facebook advertisers, this information may not be of that much concern, though. Companies need to advertise, and when they spend money for an online campaign, they want to see conversions. If Facebook can provide them with specific user data that brings those conversions, that may be good enough for them.

The smart choice
The fact that 68% of online users don't like targeted ads isn't a good statistic for Facebook. But in the end, if advertisers flock to the targeted ads and enough Facebook users respond with clicks, then the new strategy could prove advantageous for Facebook. Online users have learned to tune out most ads and the same may eventually be true to targeted ads.

I've experienced the Facebook targeted ads firsthand and I haven't found them intrusive. Despite some of the research, I think Facebook is smart to at least test out this avenue to see how both advertisers and users respond. The company is isn't afraid to try new advertising, which is only to its advantage, and the advantage of investors.

A long way to go
Although Facebook has worked hard on its advertising efforts lately, the company still has a long way to go to please investors. After the world's most hyped IPO turned out to be a dunce, most investors probably don't even want to think about shares of Facebook. But there are things every investor needs to know about this company. We've outlined them in our newest premium research report. There's a lot more to Facebook than meets the eye, so read up on whether there is anything to "like" about it today, and we'll tell you whether we think Facebook deserves a place in your portfolio. Access your report by clicking here.

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