GM announced the decision to drop Facebook paid ads on Tuesday in what was the first highly visible crack in Facebook's strategy and illustrated doubts about its perceived advantage over traditional media.

GM's decision followed Facebook officials' failure to convince top marketing executives at the U.S. automaker of the benefits of Facebook's paid ads at a meeting that took place in the past few weeks, people familiar with the meeting said on Thursday.

That was after Facebook officials focused more on touting the social networking website's free pages, the sources said.

"It kind of backfires on them in a funny way," said one of the sources, who asked not to be identified, of the emphasis on the free pages.

News of the meeting, which sources said took place at Facebook's Menlo Park, California, headquarters, comes on the eve of its much-anticipated market debut. The company on Thursday priced its initial public offering at the top of its target range and is set to raise up to $18.4 billion.

Facebook and GM declined to comment about the meeting or their relationship.

GM dropped its Facebook ads because they were less effective than other options such as Google's AdSense, the sources said. Facebook's ads garner about half the clicks per page view, a measure of effectiveness, compared with the average website.

Moreover, Facebook's ad prices were expected to rise after the company's IPO. Ad prices are set in auction and vary depending on the target audience.

Some investors fear Facebook has not yet determined how to make money from the growing number of users who access the website from their smart phones. Further, revenue growth from its ad business has slowed in recent months.

However, Facebook boosted the price and the size of the offering earlier this week, underscoring investor enthusiasm for the company's shares despite ongoing questions about its long-term money-making capabilities.

During the meeting with GM, Facebook officials emphasized the lure of free posted content on their website, the sources said. By contrast, the ads looked "kind of meager and perhaps expensive by comparison," one source said.

'SEE IF IT WORKS'

GM, the third-largest U.S. advertiser, will still maintain Facebook pages, which cost nothing to create and for which it pays no fees, to market its vehicles.

Sources said GM's decision was not permanent and the Detroit automaker could buy Facebook ads in the future.

"They're just going to try not doing it for a while and see how it goes; just make content and if it works, it works," one source said.

Facebook founder Mark Zuckerberg has said in the run-up to the IPO that the company was built to accomplish a "social mission," but has also ranked creating a "transformative" advertising experience as a top priority.

But so far, Facebook's "click-through rate", also known as "clicks per page view," is half the average for ads on the Internet, according to Larry Kim, founder and chief technology officer of Internet ad consultant Wordstream.

The average targeted ad on the Internet is "clicked" on by a consumer once every 1,000 times it is viewed, Kim said. Facebook's rate is half that, while Google's is 4 in 1,000.

"Facebook is good in that an advertiser can target based on age and gender by measuring certain 'likes,' but is not connecting with the right audience at the right time," he said, calling the website's banner ads staid and uninspiring.

Google's banner ads are more targeted, even following a consumer from website to website, Kim said.

GM, which ranks behind Procter & Gamble Co and AT&T Inc in U.S. 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.

(Additional reporting By Alexei Oreskovic in San Francisco and Deepa Seetharaman in Detroit; Editing by Muralikumar Anantharaman)

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