General Motors (News - Alert) today announced plans to stop using paid ads on Facebook, following the determination that the paid advertising had very little impact on consumer behavior choices. But that doesn't mean that GM will stop using Facebook (News - Alert) in terms of advertising and promotions, rather, that they'll be going about it in a whole new way.
GM has decided to focus its Facebook advertising ventures on Facebook pages instead, where it can display the content they like at no additional cost, as opposed to paying Facebook for advertising space. It's the kind of effort that makes perfect sense for GM—getting people to add GM to their friends list in a bid to find out more about GM's upcoming offerings, or in exchange for prizes, costs a lot less than paid advertising—but couldn't come at a worse possible time for Facebook.
Facebook's IPO is slated to launch this Friday, and with plans to price shares in the $34-$38 range in a bid to raise $6.4 billion or more. Facebook needs high-profile advertisers to show the service's value and potential for longevity. If big names like GM are looking at the service and saying that they can get better effect from using the standard Facebook page at no cost to promote its products than it can from actually paying for advertising, how long until Facebook's other advertisers pull their own ads and leave Facebook without a substantial source of income?
Sure, Facebook has other revenue streams in the making, like the Facebook Credits program that allows access to extra content like in-game items and movies, but these aren't enough to draw attention the way advertising would, and likely would have a deep impact on Facebook's bottom line. Those seeing such effects in advance may well even stay away from Facebook's upcoming IPO, or potentially even short the stock expecting it to crater once the hype dies down. And given earlier reports that Facebook runs the risk of losing social gaming innovators due to its current policies and stance on the companies, even that revenue stream is looking a bit threatened.
It's a bad situation for Facebook that comes at just the wrong time. But one critical question remains: can Zuckerberg et al manage to convince potential investors that just because GM jumped ship doesn’t mean that large numbers will follow GM over the rails, or is the Facebook story of rags to riches about to come to a bitter end? That will remain to be seen, and possibly sooner than anyone expected.