Facebook: Marketers Are Your 'Friends'

(page 2 of 2)

What Privacy Issues?

When Zuckerberg, 23, was asked about privacy issues during a brief press conference following the launch, he seemed almost incredulous as to why such concerns would exist. He responded by emphasizing that only users' friends would see the information. "The social actions that users have are only going to be used to create social ads for their friends," Zuckerberg said. "This is just to make the information more relevant to the user and their friends."

But the relevance of such an ad platform for Facebook cannot be overlooked. Facebook, MySpace, and other sites where people socialize and share content have struggled to get users to pay attention to the ads that support their sites. In many cases, users are simply too engaged with what they are doing on the site to bother with the ads. Some marketers on Facebook have seen response rates to ad campaigns, measured by the percentage of people who clicked on an ad after seeing it, of as low as 0.04% (BusinessWeek, 11/12/07). The average response rate on the Web is roughly 0.2%. And though marketers often fund campaigns based solely on the number of ads served, clicks are often a major measure of the effectiveness of the campaigns.

By the time of Facebook's announcement, rival social network MySpace had already announced new efforts to make its ads more interesting to users. On Nov. 5 the social network, owned by News Corp. (NWS), announced the launch of a "HyperTargeting" ad platform that lets marketers target advertising based on general location, demographic profile, and interests. The site has more than 100 interest categories and is working with brands such as Microsoft (MSFT) and XM Satellite Radio (XMSR). The company already lets brands set up their own pages where users can interact with the brand, see associated content, and join, or "friend," the brand's site. But it doesn't have a clear way of letting users' friends see that they have taken such action.

Keeping Google at Bay

Facebook is under particular pressure to make ads effective and bring in marketers. The $240 million stake Microsoft acquired in Facebook on Oct. 24th put the private company's estimated valuation at $15 billion (BusinessWeek.com, 10/25/07). To be worth that much, Facebook would have to generate $2.5 billion in revenue in three years, estimates Anant Sundaram, an expert on mergers, acquisitions, and finance at Dartmouth's Tuck School of Business. (Sundaram adds that Microsoft's investment at that valuation probably had more to do with strategy, such as keeping Google (GOOG) out of Facebook and preserving its own relationship with the social network than Facebook's actual value.)

Despite Facebook's impressive growth figures, justifying its estimated value will be difficult. Research firm eMarketer estimates that the entire social network advertising market will grow to just $2.52 billion by 2011. And MySpace owner Rupert Murdoch already has designs on much of that market (BusinessWeek, 11/5/07).

The good news for Facebook is that marketers clearly are excited by the prospect of not only getting noticed on the site but also being promoted by the people whose opinions matter most. Facebook already has 100,000 brand pages ready to go and has signed up more than 60 major advertising partners, including Coca-Cola (KO). "The next 100 years is going to be different for advertising, and it starts today," Zuckerberg told the crowd of 250 or so enthusiastic marketers and advertising executives who had gathered at a midtown loft for soft drinks, hors d'oeuvres, and a demonstration of Facebook's new ad system. "Pushing your message out to people is no longer good enough—you have to get into the conversation."

But who wants marketers in their conversation? If not enough do, the new news-feed ads will be bad news for Facebook.

Holahan is a writer for BusinessWeek.com in New York. With Robert D. Hof in Silicon Valley.