By Lindsay Blakely
October 27, 2007

By Jessi Hempel and Lindsay Blakely

Now that Facebook has scored a $240 million investment from Microsoft (MSFT) and is reportedly negotiating for another $500 million from two New York hedge funds, it’s time to ask: how is Mark Zuckerberg going to use that pile of cash to make money off his social networking site’s nearly 50 million members?

One clue came this week when a select group of national advertisers received heavy Lucite invitations requesting their presence at a Nov. 6 Facebook event in New York. The shindig falls during Ad:Tech, an interactive marketing conference, and will take place one day after Google (GOOG) is expected to announce its new social platform. The mystery event, along with the Silicon Valley’s company’s move to trademark the term “SocialAds” last month, has advertisers up and down Madison Avenue speculating about Facebook’s plans.

With a newly minted $15 billion valuation, expectations are high for the company to unveil something big. Facebook’s announcement in May that it was opening its platform to third-party developers caused quite a stir among Silicon Valley investors and sent membership skyrocketing. Yet even as Facebook has led the development charge on social networks, it has done little so far to exploit the site’s true advertising reach. The company is private and remains tight-lipped on numbers, but it is widely reported that Facebook earned a profit of $30 million this year on $150 million in sales. With a $15 billion valuation, that translates into 500 times earnings.

The ad industry is divided over Facebook’s advertising potential. Clearly the market — or at least, Microsoft — has spoken, and it’s making a very large bet that Facebook is the next big payday. Says Bryan Wiener, president of digital marketing agency 360i, “What the market is saying from an equity valuation standpoint is that creating an open system in the long run is going to create more value than trying to have a closed system.” Wiener notes Facebook will have to now help marketers bring “value into the conversation” and thereby appeal to Facebook users.

So far, however, Facebook’s advertising opportunities have been limited to banner ads that run down the side of pages and smaller ads that appear in news feeds. Advertisers can also pay to sponsor groups.

The question now is whether a cashed-up Facebook will bring the leadership, drive and vision to advertising that it has brought to software development. Ad industry magazine AdAge reports that the social network may be looking to tweak behavioral targeting technology so that advertisers can use Facebook profile data to target users even when they’re off Facebook. Let’s say a Facebook member declares her favorite movie is The Breakfast Club. Facebook could sell that information to a movie studio, which would then use it to send ads about its next film to her when she’s on other sites.

A Facebook spokeswoman declined to comment on the company’s advertising plans.

Facebook could also experiment with some other alternatives.  “Facebook thinks in a big and different way,” said Forrester Research analyst Charlene Li. She says advertisers and Facebook members could both benefit if users could choose which ads appeared on their profiles — rather like the way they choose which applications they want to add. “That level of brand affinity is extremely valuable and could potentially redefine the way advertising is done,” Li says. Facebook will of course need to disclose how it’s going to use personal information to avoid a privacy backlash.

But some say that Facebook will face a significant challenge in trying to make money off the information provided by its members. Rishad Tobbacowala, CEO of the Denuo Group, a consulting wing of the Publicis ad agency, says Facebook will need to do something radical because so far social networks have not proven to be effective advertising vehicles. “All of that profile data is actually not that targetable right now,” Tobbacowala says. “It’s too broad. This is a question of class versus mass and they’re going to have to give marketers the ability to do things better than they could with mass media.”

Still, an increasing number of ad dollars are being sunk into social networking. U.S. ad spending on social networks will likely total $900 million in 2007, up from $350 million in 2006, according a May report from market research firm eMarketer. By 2011, it is predicted to jump to $2.5 billion. And as advertisers move to brand advertising on the Web, they will look to use more targeted advertising that goes well beyond the traditional banner ad.

But with Facebook growing by 200,000 registered users every day – the site received nearly 1 percent of all Internet visits in the week that ended Oct. 20 – other ad execs counsel patience. “They’re trying to achieve something Google achieved several years ago with page rank,” says Mark Ury, the consumer experience architect for Blast Radius, a digital ad agency that was bought by British marketing giant WPP last week. “It wasn’t until Google connected the dots through page rank that the web became supercharged. If Google helped us find things, Facebook is aiming to help us find each other. They are trying to build an operating system on the Web.”

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