It News: Facebook Makes It Official: An External Advertising Network Is Coming Soon

Facebook Makes It Official: An External Advertising Network Is Coming Soon

By Mathew Ingram on November 26, 2012

A view of an Apple iPad and iPhone displaying the Facebook app's splash screen

There’s been a lot of discussion over the past few days about the recent changes to Facebook’s (FB) privacy and governance policies—including the revelation that (gasp!) Facebook is not actually a democracy—but one element of the new rules has gotten less attention than it probably should: Namely, the giant social network is going to use the data it has about your likes and dislikes to show you ads outside of Facebook. This is the first real confirmation that the company is going to roll out an advertising network that extends beyond just its own walled garden, and it could turn out to be one of the biggest factors in the success or failure of Facebook’s revenue-growth strategy.

It’s true that the network wants to do away with the voting process it implemented as a way of improving its governance policies, which required it to get 30 percent of its users to support something before it could make a significant change. But this approach was mostly a failure before it could even get started, since the last vote the company held saw 0.03 percent of users participate—and as more than one person has pointed out, getting 30 percent of Facebook users to vote would mean 300 million people, which is more than twice as many as voted in the recent federal election in the U.S.

In any case, the company has other goals it needs to meet first, and one of those is generating enough revenue to make Wall Street and other investors happy with its $50 billion market capitalization. And that has put a lot of pressure on Facebook to come up with a winning mobile strategy, among other things, since its click-through rate for traditional ads is abysmal.

Sponsored stories (which have been criticized in a number of jurisdictions, and could become illegal soon in Norway, according to one recent report) are one way of trying to solve that problem. An external advertising network—one that uses information about users and their activity on Facebook as a way of targeting external ads on other websites—is another way. Chris Dixon, the Hunch founder who just became the newest partner in Silicon Valley venture-capital firm Andreessen Horowitz, has described this as an “embedded option” for Facebook investors, meaning it could stand to significantly enhance the company’s financial prospects if it is handled properly.

“An external ad network is inevitable. Google proved this model with Adsense. With an already huge base of advertisers bidding on CPCs, it is impossible for most other ad networks to compete on publisher payouts. But Facebook’s traffic is so great now that an external ad network might increase their revenues by 2x or so.”

To put this in perspective, if an external ad network did manage to double Facebook’s revenues, that would take them to almost $10 billion a year from their current level of about $5 billion. Theoretically at least, it could push them even higher if Facebook manages to attract enough advertisers with its targeted data.

There have been hints the company was planning to roll out such a network: Earlier this year, Facebook experimented with sponsored stories on Zynga’s (ZNGA) website that were governed by the data the social network had about users based on their activity inside Facebook. And the company also provided a preview of the latest changes in May, although most of the attention at that time was focused on the privacy implications. Now it has become even more obvious that an external ad network is the goal—and Facebook’s chief privacy officer said as much in a comment to Forbes magazine about the new rules:

“Everything you do and say on Facebook can be used to serve you ads. Our policy says that we can advertise services to you off of Facebook based on data we have on Facebook.”

As Quartz points out, the first outcome of this new approach could be the introduction of ads to Instagram, which was acquired by Facebook earlier this year for $735 million. But the social network is sure to extend that to other websites and services it could partner with—if only because the kind of data Facebook has on user behavior (even though it is anonymized) is one of the biggest potential treasure troves of ad targeting that exists online. Access to information about the browsing and liking habits of a billion people isn’t something that comes along every day.

Google (GOOG) has built a multibillion-dollar advertising business around showing people relevant ads while they search, and so far nothing has been able to match the effectiveness of that approach. But if Facebook is able to target ads on external websites and services based on the data it has, we could see one of the first major challenges to Google’s ad dominance.