Facebook Sells Your Friends

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That obstinacy comes directly from Zuckerberg, say colleagues—ironic given that the CEO blessed the blending of ad content and conversation in user's personal news feeds when the site rolled out engagement ads in 2008. Zuckerberg says that ads, just like videos and news links, make it into the main stream of activity only when friends want to share them. "The most important thing for ads is that they work in the same way as everything else on the site," he says. Zuckerberg meets with advertisers "every once in a while" but says that he spends most of his time working on new products and ensuring consistency across Facebook's various services.

Instead of allowing advertisers to be flashy and creative, Zuckerberg and his colleagues want to provide them with more data to improve their targeting ability. For example, the company recently entered the field of location services, pioneered by outfits such as Foursquare, which allows people to "check in" from various physical locations. Use this tool, and Facebook will not only know who you are and what you are interested in, but also where you are and when. That could unlock a potentially rich trove of data for small local businesses, which have had few opportunities to build their brands, save for perhaps Yellow Pages listings and billboards.

Earlier this year, Facebook also added "like" buttons to thousands of sites across the Web and to tens of millions of individual pieces of data, such as hockey players on NHL.com and each song on Internet radio site Pandora. The initiative, dubbed the Open Graph, is the fulfillment of an idea Facebook first pursued disastrously in 2007 with its Beacon service, which broadcast information about people's Web purchases to the site without their explicit permission. By exporting its "like" button across the Web, Facebook can get people to volunteer their tastes and preferences and then develop more comprehensive psychographic profiles on its members.

Leveraging "Like"

The new data could also help advertisers find pools of potential customers, using a technique called "predictive targeting." All that "like" data streaming into its servers could let Facebook figure out that an advertiser selling pasta sauce, for example, has a viable audience in members who like a particular hockey player or stream a certain type of song.

Data collection companies such as Quantcast, BlueKai, and Media6Degrees have provided this kind of service for years by recruiting panels of volunteers, tracking their online behavior, and extrapolating common characteristics. Advertisers can also use Google to make connections between, say, people who search for good restaurants and their interest in booking travel plans. But with the new data, Facebook is poised to make these statistical leaps.

Facebook quietly rolled out an ad tool called "learned targeting" last year, which lets companies pitch ads to the friends of their existing fans or to people that Facebook believes share common attributes. Bowen Payson, manager of online and digital marketing at Virgin America, calls this "a marketer's dream." Unlike other data collection companies, Payson says, this kind of targeting on Facebook "is not based on intuition or science. It's more based on reality." He plans to begin experimenting with the service later this year.

The challenge for Facebook is how to evolve its pioneering advertising capabilities without mobilizing its opponents. "The fact of the matter is that Facebook is built on a viral marketing house of cards," says Jeff Chester, founder of the Center for Digital Democracy and one of Facebook's fiercest foes in Washington. He wants regulators to force the company to be more transparent about its data collection habits. "It's all about getting, through largely stealth means, a consumer to endorse a product or a brand and to communicate that to their network of friends," he says.

Facebook objects to the notion that it is doing anything secretly, though the heated rhetoric has the company moving cautiously. It has revised its terms of service and privacy policies—to much controversy—and rolled out granular privacy tools that let members manually control the flow of information to and from certain friends. It does not, however, allow members to withhold data from its ad targeting system.

The company also has an obvious opportunity: to offer its ad network to the rest of the Web, as Google does with search ads and Yahoo does with display. Facebook could easily extend its targeting capabilities to the tens of thousands of websites that now use its "like" buttons and allow people to log in with their Facebook user name and password. The company also could offer to fill parts of these sites' ad space while taking a cut. Jeremiah Owyang, an analyst at Altimeter Group, says that such an ad network is a "ripe opportunity" and likely goal for Facebook, but it will not happen right away. "They test everything and like to take things slow," he says. COO Sandberg says: "We are not working on that now. I'll let you decide whether that makes sense."

Hundreds of millions of people around the world "like" Facebook. It's useful, and thus far Zuckerberg and Sandberg have walked the line between providing a service to members and a platform to advertisers. With each technological advance and product rollout, though, the line moves. And it's not yet clear how those hundreds of millions of people will feel when they realize they've been permanently joined on the site by advertisers who are not all that interested in friendship.

Stone is a reporter for Bloomberg Businessweek.

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