I've been pondering the implications of Facebook's SocialAds announcement and it has created some interesting lines of thought. The moment the pin dropped was when Dave Winer linked to one of his old posts that contains the following money quote

that's when the whole idea of advertising will go poof, will disappear. If it's perfectly targeted, it isn't advertising, it's information. Information is welcome, advertising is offensive.

If you think about it, the reason Google makes so much money from search advertising is because the ads are particularly relevant when a user is seeking information or a trusted opinion as part of the process to make a commercial decision. If I'm searching for "iPod" or "car insurance" then it is quite likely that ads selling me these products are relevant to my search and are actually considered to be information instead of intrusive advertising

Where Google's model breaks down is that a large amount of the advertising out there is intended to make you want to buy crap that you weren't even interested in until you saw the ads. In addition, trusted recommendations are a powerful way to convince customers to make purchases they were otherwise not considering. Former Amazon employee Greg Linden has written blog posts that indicate that 20% - 35% of Amazon's sales comes from recommendations like "people who like 50 Cent also like G-Unit". Given that Amazon made over 10 billion dollars in revenue last year (see financials), this means that $2 billion to $3.5 billion of that revenue is based on what Facebook is calling "social" ads.

So what does all this have to do with the title of my blog post? Glad you asked. Recently Yaron and I were chatting about the virtues of the Facebook platform. He argued that the fact that applications are encouraged to keep their data within their own silos (e.g. Flixster isn't supposed to be mucking with my iLike data and vice versa) prevents everyone [including Facebook] from benefiting from all this profile data being created from alternate sources. I argued that seeing the complexities introduced by having multiple applications being able to write to the same data store (e.g. the Windows registry) it's a lot better for users and app developers if they don't have to worry that some half baked app written by some drunken college kid is going to hose their Scrabulous scores or corrupt all their movie ratings. 

However what this means is that some of the juiciest data to serve "social" ads against within Facebook (i.e. movies and music) is not in Facebook's databases but in the databases of the developers of Facebook applications like Slide, iLike and Flixster. Considering the following entry that shows up in my friends news feeds after I performed an action in iLike ,

This entry could be improved with "social" ads in a way that is informative and valuable to my friends while also providing financial value to the application developer. For instance, would you consider the following changes to that entry to be advertising or information?

Flixster does an even worse job than iLike in making the actions they show in my news feed to be both useful and monetizable. Here's the kind of stuff that shows up in my news feed from Flixster

I don't know about you but I consider this spam. In fact, it is also misleading since what it really means is that someone on my friends list (Steve Gordon) has also installed the Flixster application on their profile. However what if the application actually published some of my movie ratings into the news feed with more context such as

People keep asking how Facebook application developers will make money. From where I'm sitting, this looks like a freaking gold mine. The problem seems to be that these applications either haven't yet figured out how lucrative a position they're in or are still in the audience acquisition phase until they flip to the highest bidder.

If Mark Zuckerburg has any strategic bone in his body, he'd snap up these companies before a hostile competitor like Google or Fox Interactive Media does. I'd put money on it that people are slowly realizing this all over Silicon Valley. 

What do you think?


Sunday, November 11, 2007 4:37:58 PM (GMT Standard Time, UTC+00:00)
I think it's *great* that you're reading my stuff.

I wish more people at Microsoft would have listened when I was trying to talk with you guys. Most people focused on how I spoke, not what I was saying. Had I known they were going to do that I would have hired an actor to speak for me. :-)
Sunday, November 11, 2007 5:59:36 PM (GMT Standard Time, UTC+00:00)

Your analysis is absolutely logical and "lateral thinking".

Further, it makes sense that Microsoft make these acquisitions directly as a very inexpensive and strategic way to leverage (and add value) their existing investment in FB.

It would represent a "bottom-up" complement to their "top-down" strategic position currently in FB.

BTW, I have just started following your blog and have found it extremely informative. Thanks. I was pointed to it from Marc Canter's blog!

Paris, France
Alexander Ainslie
Sunday, November 11, 2007 9:00:27 PM (GMT Standard Time, UTC+00:00)
Great post!

I still think Google benefits from all this because their positioned closer to the Golden Moment when you are about to purchase. I think FB and similar players have more to do with creating the appetite than satisfying it. In that sense, they may drive even more traffic to Google, and dollars to the GOOG's coffers. More on my blog:

Sunday, November 11, 2007 11:20:01 PM (GMT Standard Time, UTC+00:00)
You are right about the ownership of profile data - whether implicitly gathered or explicitly supplied - is where the money will come from. Facebook could either own the data, or trick other companies into sharing with (just) them.

I also think that what Dave W wrote about good ads being 'information' is right on. I've been sitting on a post for several months about this idea - ads becoming a flow of information from a helpful 'software agent'.
My company is also in the business of user profiling (gathering attention data) and building interesting apps that give value back to people based on this profile information - all visible and managed by the members themselves. For example, if we know that you just bought tickets to Florida, rather than showing you ads for airlines, we'd like to show you the weather, or traffic conditions, or people you know who are going to be there too, etc. I think of how to use attention data in terms of a post-advertising world. It's extremely interesting to follow the build out of the ecosystem of widgets which are really 'attention sensors' and the services hosting them which are really 'attention storage'. Fun stuff!
Monday, November 12, 2007 5:33:12 PM (GMT Standard Time, UTC+00:00)
great stuff dare.

and you're right there's a ton of opportunity to improve News Feed messaging -- altho there hasn't been a lot of incentive for developers to do so until app messages are visible to non-app users (which appears to have *finally* been enabled, at least minimally.

but i don't know whether it's imperative that FB acquire Flixster / iLike / others with vertical community success -- in fact, there's perhaps some caution to that approach if FB scares off other platform competitors -- but i do agree that acquiring deeper profile data & actions is the key to unlocking a new category of online advertising revenue.

overall, i think FB has the potential to enable the "long tail of minor celebrity endorsements"... which as you suggest could be a big money maker if they figure it out. only thing is, they should probably be paying those people as well. potential issues with subverting the legitimacy of those people if you pay them, but i think it could be managed.

anyway, enjoyed your piece & perspective.

- dave mcclure
Friday, November 23, 2007 8:05:04 PM (GMT Standard Time, UTC+00:00)
Although you're right that this data is silod, notice that Facebook has access to most of this data in the same way that Google has access to Web pages for contextual ads, except that Facebook's (closed) model is a better walled garden than Google's for keeping out (or at least controlling) competitors.

Facebook applications post most of their data through Facebook as a proxy, instead of directly to clients. The Facebook proxy can and surely does "scrape" the data similarly to how Google scrapes Web pages. This enables all sorts of interesting things like tagging individual profiles with ad keywords (Yahoo! also has strong user engagement and tracking; Google's more challenged here, having little in the way of user-engagement beyond search and maps and ads). And then Facebook can also calculate approximate valuations and engagement per-user and per-app. Lots of data for Facebook to serve up highly targeted monetizable "information", and lots of ways for Facebook to shop that out to advertisers.

Having a broad advertiser base is key to raking in the money. Sure, iLike or Flixster can partner with a few media and ticket distributors and others close to their market, but other large advertisers like P&G and GM or advertisers wanting to target specific demographics or keywords? One of FB's strengths is being able to reach this broader advertiser base.
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