Yesterday I saw a blog post by John Battelle where he said he turned down a chance to be part of discussion on a television show about whether Facebook is the next Google. This seems like a pretty absurd assertion on the face of it and the reason is snuggled somewhere in the middle of Robert Scoble's post Why Facebook, why now? where he writes

Everything I do in Facebook is about interacting with people. For instance, at the top of my Facebook inbox right now is Ryan Coomer. The advertising next to him says “Try Forex Trading Today.” There is absolutely NO connection between who Ryan is and the advertising that’s put next to him.

Imagine if advertisers could “buy people.” I just clicked on Ryan’s profile, hes into Running and Golf. Why don’t ads for running and golf gear get put onto his profile? Wouldn’t that make sense? He’s also a software developer. Where’s the Visual Studio advertisement? He’s into video games. Where’s the Halo 3 advertisement?

Translation: Facebook needs an advertising platform and it needs one in the worst way. I’m not going to even look at the ads until the ads are tied to the people on Facebook. Facebook knows what we’re into, put ads for those things onto our profiles and messages.

Robert Scoble is both right and wrong. He is right that Facebook needs an advertising platform but he is wrong about how it should be used. If Facebook has detailed demographic data about all its users then it makes the most sense to show the user what they are most interested in and not what the person they are currently interacting with on the site is most interested in. That's counter productive. I hate running and golf, I like G-Unit and alcopops. Which ads does it make more sense to show me if I'm browsing Ryan Coomer's profile?

Anyway, that's besides the point. Let's go back and look at what made Google such a compelling investment when they had their IPO. The company had

  1. An extremely popular website that served a key need for its users. 
  2. A way to make a metric ton of money from their popularity via search ads.

#1 is obvious but #2 needs further clarification. Search advertising created a paradigm shift in the advertising market in several ways. For one, it was the first time in the history of advertising that advertisers had a way to conclusively calculate the ROI of their advertising campaigns compared to other media (TV, newspapers, radio, sponsorships, etc). More importantly, it allowed advertisers to target people when they were in the process of making a buying related decision (i.e. doing research). For the most part advertising is often intrusive, irrelevant and often just plain annoying. On the other hand, ads shown when you are doing research for a commercial transaction are exactly what you want. It is quite telling when you look at highest paying search terms and see that it is for terms like "mortgage refinance", "dui" and "consolidate loans". When searching for those terms I want to see ads, in fact the more ads the better.  What is most interesting is that even though the majority of searches on the Web are non-commercial, this was still a goldmine which could only get more lucrative as more people got on the Web and advertisers eventually realized that their dollars needed to follow the eyeballs and search advertising was actually an easier expense to justify than all their other ad campaigns.

Now we know what made Google such an attractive investment back in the day which has now turned itself into a major force in the software industry and on the Web. So what does Facebook have?

  1. An extremely popular website that served a key need for its users. 
  2. The hope that way will be able to make a metric ton of money from their popularity via highly targeted ads based on all the rich demographic data they have about their users.

The initial thrust of #2 is that Facebook hasn't figured out how to make money yet. More importantly, if they do figure out how to build an ad platform it will likely be a system that is more complex than Google's Adwords and AdSense combined. When you think about it Adwords is pretty simple, allow people to bid on search terms then show these people's ads when people use those search terms. AdSense is similarly straightforward, use term extraction to convert the content on the page to the equivalent of search terms and show ads from the people who bid on ads. Of course, the devil is in the details and is mainly about optimizing how much money can be extracted from their advertisers.

On the other hand, if you want to show display ads based on demographic data you'll also need to build something very similar to a recommendation system as well as everything else I've described because you want to know that if I like wearing G-Unit clothing that I probably wouldn't mind seeing ads for Ecko Unlimited wear either or that if I like music by Young Jeezy that I probably would like music from T.I. or that if I've read Freakonomics I probably wouldn't mind reading The Tipping Point.

Now let's assume that the developers at Facebook figure out how to build an advertising platform that is more complex than Google's Adwords and AdSense combined. There is still the question of whether the "spray and pray" approach that is the hallmark of display advertising [even if you are sure that the ads will be about the topics the user is interested in]  is a more lucrative model than showing people ads when they are actually looking for something via search ads. I personally don't think it will be but I'm no expert and I'm definitely no fortune teller.

I suspect that the folks at Facebook will eventually realize how hard a problem it is to monetize their users in a way that justifies the exorbitant valuation that has now been placed on them. When that time comes, I wouldn't be surprised if they find some sucker to buy them based on the promise that they present as opposed to the value that they actually bring. Almost like when Yahoo! paid $5 billion for which gave us the Mark Cuban we all know and love but also ended up as one of the top five worst billion dollar acquisitions of all time in the Internet space.


Friday, July 13, 2007 5:28:07 PM (GMT Daylight Time, UTC+01:00)
You're right, of course, but I can't help but observe that nearly a year ago, "Facebook and Microsoft Corp. today announced a strategic alliance in which the two companies will collaborate to bring relevant advertising to the more than 9 million registered users of Facebook, the Internets leading social directory. Microsofts advanced advertising technology and Facebooks unique social network make possible the multiyear collaboration grounded in the two companies commitment to technological innovation."
Saturday, July 14, 2007 10:53:05 AM (GMT Daylight Time, UTC+01:00)
Insightful read...
Monday, July 16, 2007 12:53:10 AM (GMT Daylight Time, UTC+01:00)
I'm not sure they need the recommendation system. In theory, Adsense/Adwords would work better with one, too, but instead they outsource that work to their clients.

Think people who like G-Unit clothing are also interested in Ecko? Then someone can bid on "G-Unit" and display an ad for Ecko...

That also has the advantage of giving clients control. If they are paying for impressions, it necessarily clear that they will trust a recommendation system. There's also the potential for people to deliberately try and game the recommendation system to run up costs for their competitors.

Ultimately perhaps it makes sense to build a recommendation system, too - but I'd imagine that could be a second step, which they use to fill up inventory
Monday, July 16, 2007 6:47:25 PM (GMT Daylight Time, UTC+01:00)
The difference is that with search ads, the advertiser can buy keywords related to (i) their product category,(ii) their brand or (iii) their competitors brand and know that it will be effective because users were actually seeking goods or services that they provide.

With display ads and Facebook profiles, it is highly likely that the neither the product category nor any of the brands in that category are named by the users that would be interested in ads for that product. For example, it is quite unlikely that anybody writes what clothing brand they like in their profile. On the other hand, you can infer that if I'm a young, male, hip-hop fan then I am interested in hip-hop themed clothing.
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