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Facebook Probably Shouldn't Be Bragging About This

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Stop the presses!

Facebook (NASDAQ: FB  ) has officially reached the milestone of 1 million active monthly advertisers on its ecosystem.

Before you bust out your favorite bottle of bubbly to celebrate, this headline could benefit from a little perspective.

It turns out that the vast majority of advertisers that do business with Facebook are of the small-business variety. Take a wild guess how many small businesses have a presence on Facebook: 16 million.

The less than 6.25%
When you break it down, 1 million active advertisers represents 6.25% of the 16 million small businesses on Facebook, assuming that all 1 million advertisers are, in fact, small businesses. Of course, this isn't the case when big brands like McDonalds, Coca-Cola, General Motors, and then some, are advertising on the site. The exact percentage of active advertisers is difficult to pinpoint, because Facebook doesn't release total business Fan Page statistics, but it's safe to say that it's lower than 6.25%.

Why so low?
When I read between the lines, Facebook doesn't appear to be rapidly winning over marketing budgets, and there are two factors likely at play here. The first is how infantile Facebook's ad measurement technology is -- it only recently improved when the company purchased Atlas from Microsoft last March. It's worth noting that Atlas did help persuade General Motors to re-establish its campaign after an 11-month hiatus, but, as a whole, it's still too early to call Atlas a smashing success.

The second factor is how Facebook has essentially become a freeloader's paradise for businesses. According to BIA Kelsey, a research firm that specializes in local advertising, more than 50% of small business owners utilize Facebook to promote their businesses, but only 16% spend money on ads. The fact that businesses get a free Facebook Page to grow their presence could be undermining the company's advertising ambitions. For the businesses that have the ability to grow their fan base organically, there could be little incentive to spend money on advertising.

A change of tune?
I'm left wondering exactly how Facebook will convert a larger percentage of freeloading businesses into paying customers. More robust advertising tracking technology could help convince the bigger advertisers with deep marketing budgets, but what's going to incentivize businesses that are perfectly content running a free Fan Page?

With Facebook's massive scale, the company does have pricing power, and could begin charging business pages a monthly fee if they have more than a specified number of likes. If other efforts to grow its base of advertisers fail, I wouldn't be surprised if this last resort becomes a reality.

After the world's most-hyped IPO turned out to be a dud, many investors don't even want to think about shares of Facebook. But there are things every investor needs to know about this revolutionary company. The Motley Fool's newest premium research report shows that there's a lot more to Facebook than meets the eye. Read up on whether there is anything to "like" about it today to determine if Facebook deserves a place in your portfolio. Access your report by clicking here.

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9/27/2016 3:07 PM
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