Image: Mark Zuckerberg
Tony Avelar  /  AP
Facebook CEO Mark Zuckerberg talks about the social network site’s new localization services called ‘Places’ at a recent press event. Facebook plans to leverage its 550 million users into the greatest advertising juggernaut since Google.
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updated 9/24/2010 7:28:01 AM ET 2010-09-24T11:28:01

There were two obvious winners at the FIFA World Cup this summer. Spain took home the 13-pound, 18-carat-gold trophy for its achievement on the field. Nike won the branding championship, thanks largely to a three-minute commercial called "Write the Future," in which its stable of soccer endorsers fantasize about the glory or disgrace that might result from their play in the tournament. Hundreds of millions of people saw "Write the Future" on television. Before it blanketed traditional media, however, Nike launched the video on Facebook, the Web's dominant social network.

The video started as an ad on the site. Then it was passed from friend to friend, often with comments and members recommending it. In the resulting discussions, the clip was played and commented on more than 9 million times by Facebook users—and helped Nike double its number of Facebook fans from 1.6 million to 3.1 million over a single weekend. Getting the ad onto Facebook cost a few million dollars, according to the companies. All that passing around was free. Davide Grasso, Nike's chief marketing officer, says Facebook "is the equivalent for us to what TV was for marketers back in the 1960s. It's an integral part of what we do now."

Marketers have long hoped to turn the Web into the perfect advertising medium. Pop-ups on AOL, banners on Yahoo!, and search ads on Google were steps along that journey. But it's Facebook, the Palo Alto (Calif.)-based social network whose life as a moneymaking business is only now beginning, that may be best positioned to deliver on the Web's promise.

The company has developed a potentially powerful kind of advertising that's more personal—more "social," in Facebook's parlance—than anything that's come before. Ads on the site sit on the far right of the page and are such a visual afterthought that most users never click them. These ads can evolve, though, from useless little billboards into content, migrating into casual conversations between friends, colleagues, and family members—exactly where advertisers have always sought to be.

"The whole premise of the site is that everything is more valuable when you have context about what your friends are doing," says Facebook co-founder and Chief Executive Officer Mark Zuckerberg, who started accepting ads on Facebook as a Harvard sophomore in 2004 in an attempt to cover server costs. "That's true for ads as well. An advertiser can produce the best creative ad in the world, but knowing your friends really love drinking Coke is the best endorsement for Coke you can possibly get."

Critics' ranks grow
All this is cause for concern to Facebook's critics—and their numbers among privacy advocates and politicians grow every time the social network pushes the boundaries of the service beyond what its users originally signed up for. People join Facebook to share their lives with friends, yet the information they reveal "is being used by strangers for completely unrelated commercial purposes," says Marc Rotenberg, executive director of the Electronic Privacy Information Center, which filed a complaint with the Federal Trade Commission earlier this year over changes to the social network's privacy policies. "That is a little unsettling."

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For now, Facebook's appeal to large brand advertisers such as Nike is at least partly a function of its size. Facebook has around 550 million members around the world, about 165 million in the U.S. alone. In contrast, about 106 million people watched this year's Super Bowl—the most watched TV program ever. According to Nielsen, Facebook users average about six hours a month on the site, dwarfing the time spent on old-line portals such as Yahoo and AOL (each about two hours). Speaking at the Cannes Lions International Advertising Festival this summer, Zuckerberg said that reaching a billion members is "almost a guarantee."

Facebook will update the advertising community on its progress on Sept. 27 when, for the third straight year, Facebook Chief Operating Officer Sheryl Sandberg will deliver a keynote speech at New York City's Advertising Week. That's hardly the reason Facebook is permeating the national consciousness, though. The Social Network, a film written by Aaron Sorkin (creator of TV's The West Wing) and directed by David Fincher (The Curious Case of Benjamin Button), premieres on Oct. 1. It portrays Zuckerberg as cutthroat and conniving, an immature prodigy who cruelly betrayed friends during the company's early days. Three Facebook executives, who declined to be quoted about a movie they say takes license with the circumstances of the company's creation, worry that the film could cause members to question their own trust in Zuckerberg and the site, just when Facebook is aggressively building out its advertising business.

Advertisers, at least, haven't expressed any qualms. Executives at many big brand advertisers wax rapturous about the site and are betting heavily on it. "A year ago, Facebook was an afterthought," says Carol Kruse, vice-president, global interactive marketing, at Coca-Cola, which has more than 12 million Facebook fans. "As we go into 2011, it's fully integrated into our marketing plans, with a reliance and a focus on it."

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Facebook's ad business is already beyond the promising stage. The company is expected to bring in revenues of $1.4 billion in 2010, Bloomberg reported earlier this year. That's about where Google was in 2003, during a similar time in the development of its now ridiculously profitable search ad network. Facebook, which remains private and has no immediate plans for an initial public offering, doesn't comment on revenue estimates. Sandberg says they're working with more major advertisers and earlier in the planning stages of their big campaigns.

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As important as technology is to Facebook's success, Sandberg, 41, runs a close second. After working for Lawrence Summers in the 1990s at the World Bank and later as his chief of staff at the Treasury Dept., she moved to Silicon Valley to oversee the ad business at Google. In 2008 she left Google for the experience of running a startup—and because she believed Facebook was the better bet to win in brand advertising, which accounts for 90 percent of the $600 billion ad market. "We are in a much bigger market than Google, and we have much, much more runway," says Sandberg.

Advances in ad targeting
John Wanamaker coined the advertiser's dilemma—"Half the money I spend on advertising is wasted; the trouble is I don't know which half"—nearly a century ago. Until the advent of the Web, it was hard to argue that the percentages, or even an advertiser's ability to track them, had improved much.

The Web has now advanced to the point that most large sites can serve ads based on a user's browsing history. Google, which intercepts users at the vulnerable moment when they're searching for information, has ridden its refined brand of targeting to $23.6 billion in revenues last year. Facebook takes targeting even further. If you recently got engaged and updated your Facebook status to reflect it, you might start seeing ads from jewelers in your hometown. They've likely used Facebook's automated ad system to target recently engaged couples living in the area. If your profile mentions your appreciation for old-school hip-hop, the right local wedding DJ can find you, too.

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David Belden, founder of Residential Solar 101, a San Francisco reseller of solar panels, knows exactly who his customer is: male, around 55 years old, and with an environmental conscience often demonstrated in the ownership of a hybrid car. That's right in Facebook's wheelhouse. "I can target my exact audience, rather than trying to come up with a proxy for it," like looking at search terms or which websites people visit, says Belden, who was spending about $4,000 a month on Facebook earlier in the year before he was forced to rein in his marketing expenses because of budget issues. He adds: "If I was bidding on expensive Google keywords like 'solar,' I'd be going against guys with a much larger marketing budget."

Half of Facebook's members check the site every day. Most update their status, use Facebook e-mail or chat, and upload photos without noticing the timid advertising on the side of the page. Limited to small rectangular boxes with a photo and only 160 characters of text, the average ad is clicked on by less than a tenth of a percent of the site's users, according to advertisers and analysts, including Greg Sterling, a San Francisco-based Internet marketing consultant. Google ads, which are triggered by searches for specific topics such as "new diet plans" or "SUV or minivan" can draw clicks from up to 10 percent of all searchers. They are also far more expensive.

Those terrible click-through rates limit the overall effectiveness of Facebook's targeted ads—which would matter a lot more if all Facebook were selling was clicks. The site talks up more ephemeral measures such as recall and brand recognition, which it argues can be boosted by social activity that occurs around an ad. Facebook calls its ads "engagement ads," because they ask users to take action: play a video, vote in a poll, RSVP to an event, or just comment or click a button to indicate that they "like" it. The "like" button, which Facebook has gradually attached to just about every piece of content on its site and others across the Web, is intended to convey a general recommendation to a member's friends. So while a great majority of users ignore the great majority of ads on Facebook, the numbers change when, say, an ad for a local restaurant is footnoted by friends' names: ("Jordan, Jen, and 3 other friends like this").

That social endorsement is a tiny mnemonic designed to make the ad catchier, and it works. Nielsen, which started measuring the efficacy of Facebook ads a year ago, says that if users see their friend "likes" an ad or has commented on it, they are up to 30 percent more apt to recall the ad's message.

Ad philosophy differs from Google's
If enough of your friends like or comment on the ad, the ad can escape its right-side quarantine and jump into your main news feed, along with the names of your friends and all the conversation around the ad. The advertiser pays nothing for this migration. In the industry, it's called "earned media." (Think of a teenager wearing a Nike T-shirt or Ellen DeGeneres enthusiastically talking about a product.)

Here's where Facebook's ad philosophy differs from Google's. The search giant operates under the orthodoxy of traditional media. Just as in a magazine or newspaper, advertising on the site is explicitly labeled and separated from its editorial content—in Google's case, search results are separate from sponsored links. Ads on Facebook, however, can transform into casual buzz inside a user's news feed, the online equivalent of water-cooler conversation. Twitter, which is only now starting to develop its own ad system, sits somewhere in the middle. It allows members to "retweet" ads to their followers, an action whose meaning, Twitter executives argue, is more powerful and less ambiguous than "liking" or commenting on an ad.

Facebook's promise to advertisers isn't to get consumers to buy their products—or really even to get them to click through to their website. Instead, it wants to subtly park the advertiser's brand in the user's consciousness and provoke a purchase down the line. More immediately, it also aims to get you to "like" the brand yourself, which then serves as a sort of all-purpose opt-in, allowing the advertiser to insert future messages into your feed.

Advertisers love this setup for obvious reasons. It costs nothing for that company to speak continually to a user via his news feeds once that user has indicated he "likes" a certain brand. It also allows corporations viewed skeptically by the press to have unmediated conversations with their customers and to get those customers to evangelize their friends.

Ford, 7-Eleven, and McDonald's have all recently unveiled products on their Facebook pages, in some cases using their fan groups to help design those items in advance. Starbucks offers coupons and free pastries to its 14 million fans; BP used its Facebook page, with about 40,000 fans, to release statements and photos about its attempts to plug the oil spill in the Gulf of Mexico (and had to contend with a much larger Boycott BP page, with 800,000 fans). Other brands use Facebook to pursue what they describe as their product's "service mission." Special K's page dispenses nutritional tips; Nature Valley ruminates about national parks and nature photography.

"For what could be considered the cost of a 30-second spot, you have a year's worth of conversation with people who love the brand," says Jim Cuene, director of interactive marketing for General Mills, which owns the Nature Valley and Betty Crocker brands. Anton Vincent, marketing vice-president for General Mills' baking products division, adds that Facebook allows the company to "leverage the loyalty" of its best customers. "If someone likes Betty Crocker and they tell that to 150 other people, they are helping us to market our brand. In some ways it's a more credible message to the community."

Army of salespeople
Many Internet companies focus on building technologies, not sales teams. They create self-service systems to take ad orders over the transom. Facebook has an automated system for smaller advertisers—and a burgeoning army of real-live salespeople.

Thanks to Sandberg, its business staff is divided into three groups, a structure that's identical to Google's. The direct-sales operation—led by Mike Murphy, an affable, well-connected former regional sales director at Yahoo—coordinates with the world's top 250 advertisers as well as big interactive agencies such as AKQA in San Francisco and Tribal DDB in New York. Grady Burnett, one of the hundreds of former Googlers who sought out a new challenge and greater financial opportunity at Facebook, oversees inside sales, which reaches out to medium-size companies and tries to get them to maximize their spending on the social network. Burnett also runs the self-service ad system, which brings in about half of Facebook's overall revenues.

People with knowledge of Facebook's operations say it has about 300 sales people—and the number is growing. Facebook currently lists more than 50 sales openings on its jobs board, including positions for head of sales (Italy) and associate manager of ad operations (Dublin). "We very much have the view here that this product has only just begun," says David Fischer, who joined the social network in March as vice-president of advertising from—where else?—Google. "There is a lot more work to do."

One area calling out for attention is Facebook's relationship with ad agencies. Agencies almost uniformly praise Facebook's potential. They also want to flex their creative muscles and do more on the site's pages, but Facebook refuses to allow advertisers to break out of the advertising ghetto. "We do think the creative canvas needs to be a little more flexible, but that is their decision," says Paul Gunning, chief executive at Tribal DDB, which has steered companies such as McDonald's and Johnson & Johnson onto Facebook.

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.

Copyright © 2012 Bloomberg L.P.All rights reserved.

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