Why Path is holding out on ads for now

March 12, 2012, 3:32 PM UTC

By Richard Nieva, contributor

FORTUNE — Path, an app billed as the social network for close friends and family, announced a bevy of new features last week, including an integration with a Nike app for runners and music recognition software. But one thing isn’t changing: the network will remain closed to advertisers.

The social network, which limits users to 150 friends to keep the experience intimate, has 2 million users and boasts strong engagement: 100 million shares by users since the app’s launch in November 2010. What’s more, 70% of its users return every week. (By comparison, more than half of Facebook’s members use the site on a daily basis.) It’s also caught the attention of Facebook’s Mark Zuckerberg — CEO Dave Morin’s former boss — who is reportedly “afraid of Path.”

Morin, an early member of the Facebook team, held a variety of roles in marketing and strategy as the social network grew to a whopping 800 million users worldwide. Before leaving in February 2010, he co-invented Facebook Connect and the Facebook Platform, two signature developments that helped the company surge. The former allowed Facebook users to transport their friends and connections around the rest of the web with them; the later provided the foundation for millions of app developers, including the likes of Zynga (ZNGA).

Path is a quite different proposition. Morin describes it as the dinner table of the Internet. More importantly, this focus on private interaction, he says, is the reason Path hasn’t pursued advertising revenue thus far. “That’s really important to us,” said Morin, during his first keynote ever at the company’s San Francisco headquarters. “If we are indeed focused on the personal nature of the network, then monetizing through a traditional advertising system goes against that principle.”

Morin didn’t reject the possibility outright but, he says, ads would have to fit seamlessly into the network’s “ethos.” This means using an opt-in model or requiring advertising to be content-related. (Path currently brings in some money from Apple (AAPL) iTunes affiliation fees and by selling filters for the app’s in-house camera.) “If Path can figure out a mechanism where the ads are relevant enough, then that’s a very exciting proposition,” says Max Willens, an analyst at Abrams Research, a digital and social media marketing agency. There’s also the valid concern that users may be turned off thinking their experiences are being turned into fodder for advertising, but aligning ads with a user’s preferences and sharing habits could make them even more lucrative, Willens says.

Facebook has become an attractive place for marketers to do business for that reason. In 2011, Facebook took home $3.1 billion in ad revenue for the year. By 2012, it could bring in $5 billion, according to market research firm eMarketer. The logic is simple: people value their friends’ opinions over random ads. In a network of a person’s 150 closest friends and family such as Path, that effect could be multiplied.

Path may be treading lightly because it suffered a black eye recently over privacy, though. Last month one developer complained about Path storing contacts from his phone without permission, eliciting criticism from some in the web community. The company also needs to deal with growing its user base before the prospect of advertising really becomes intriguing to businesses. There are several factors at play, but a benchmark of around 5 million users would be a healthy, round number, says Rebecca Lieb, an analyst at the research firm Altimeter Group.

For now, Path has the infrastructure it needs to connect with third parties without calling them ads exactly. Path users can sync with Nike’s (NKE) Nike+ products, which monitor workouts, to Path and share specific details of a run. Nike is the sole partner for now, but the platform will surely be ripe for others in the future. Still, the idea of an advertising platform seems distant for Morin. Any hypothetical advertising would be built around content that “we haven’t even thought of yet,” he says. Perhaps it’s time to start thinking.