DETROIT/SAN FRANCISCO (Reuters) - General Motors Co said on Tuesday it will stop advertising on Facebook, even as the social networking website prepares to go public, with a source familiar with the matter saying the automaker had decided Facebook's ads had little impact on consumers.
The decision by GM, the third-largest advertiser in the United States, marks the first highly visible crack in Facebook's strategy and underscores doubts about whether advertising on Facebook works better than traditional media.
"This does highlight what we are arguing is the riskiness of the overall Facebook business model," said Brian Wieser, Internet and media analyst at Pivotal Research Group.
"It is not a sure thing. It sure looks likely that it will be one of the most important ad-supported media properties, but it's not certain because there will be marketers who are challenged to prove the effectiveness of the marketing vehicle."
For now, these worries do not appear to be impeding strong investor demand, with Facebook Inc increasing the size of its offering by 25 percent to raise about $15 billion, a separate source told Reuters on Tuesday.
Facebook, founded eight years ago by Mark Zuckerberg in a Harvard dorm room, is expected to start trading on the Nasdaq on Friday.
GM said it will still have Facebook pages, which cost nothing to create and for which it pays no fees, to market its vehicles and added that it is not unusual for it to move spending around various media outlets.
"In terms of Facebook specifically, while we currently do not plan to continue with advertising, we remain committed to an aggressive content strategy through all of our products and brands, as it continues to be a very effective tool for engaging with our customers," GM said.
Facebook declined to comment on GM's move.
Concerns about advertising on Facebook are not confined to GM, with an executive at another large consumer products company saying it was hard to know if it is worth the money spent.
"Is it just a shiny new object, or is it a real value proposition?" said the executive, who asked not to be identified.
But Ford Motor Co said it was committed to advertising on Facebook and is boosting its spending, including ad buys.
"You just can't buy your way into Facebook," said Ford spokesman Scott Monty. "You need to have a credible presence and be doing innovative things."
More than 20 percent of Ford's marketing budget is spent on digital and social media, he said. The company launched its 2011 Explorer SUV on Facebook and other digital outlets for a fraction of the cost of a Super Bowl TV spot, which cost $3.5 million on average per 30 seconds this year.
Another fan of Facebook is Japanese automaker Subaru, which started using banner ads at the website in the past year in addition to its free content. "Advertising plus content equals more clicks to our website, which we like," Subaru spokesman Michael McHale said.
Facebook has ramped up its outreach to Madison Avenue in recent years. Last year Facebook hired Carolyn Everson, an ad industry veteran who worked at Microsoft Corp, Viacom's MTV Networks and Walt Disney Co, and the company hosted a splashy event in New York in March to showcase its newest ad offerings.
John Battelle, chairman of the Internet advertising network Federated Media, said Facebook may need to invest more heavily in building relationships with major advertisers.
It may also need to develop richer, more customized advertising offerings, even though such efforts would likely be less profitable than traditional display or pay-per-click advertising.
"GM is a warning shot across the bow," said Battelle.
GM, which ranks behind Procter & Gamble Co and AT&T Inc in advertising spending, spent $1.1 billion on U.S. ads last year, according to ad-tracking firm Kantar Media.
It spent about $271 million on online display and search ads excluding Facebook advertising.
GM spends about $40 million on its Facebook presence, but only about $10 million of that is paid to Facebook for advertising, according to the Wall Street Journal, which first reported GM's plans to drop Facebook ads. The remaining budget covers the creation of content and the advertising and media agencies involved, the newspaper said.
Additional reporting by Deepa Seetharaman and Bernie Woodall in Detroit, Jim Finkle in Boston and Martinne Geller in New York; Editing by Leslie Gevirtz, Matthew Lewis, M.D. Golan and Edwina Gibbs