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ANALYSIS - Facebook efforts hint at growing ad clout

 

Facebook's move to export its social networking features across the Internet could bolster the company's advertising business and pose an increasing threat to the Web's reigning advertising giants.

Facebook, which has more than 400 million registered users, is the No. 1 website in the United States by page views, according to comScore. But it is a relatively small player in the online ad market, where Google Inc's paid search business dominates, and a variety of Web portals and ad networks battle over billions of dollars in graphical display advertising.

With its new initiative to expand beyond the borders of Facebook.com, however, Facebook has created the framework for a new generation of highly targeted ads.

The so-called Open Graph project weaves Facebook's popular social networking capabilities directly into third-party websites. A visitor to CNN.com, for instance, can click a button to "like" certain news articles, and see which of their Facebook friends have endorsed content on other websites.

"Having all this data and all this time from consumers almost can't help but to position Facebook in a very strong way for online advertisers," said Gartner analyst Augie Ray.

In the first week, 50,000 websites signed up to provide Facebook features on their sites, according to the company. The "like" button was served up to Web surfers visiting third-party sites more than 1 billion times in the first 24 hours.

All that social activity vastly expands Facebook's trove of data about users -- information that can improve marketers' ability to reach consumers that share specific interests or traits.

"The field in which they (Facebook) can now play, it went from a 10-yard field to a full football field," said Michael Lazerow, the CEO of Buddy Media, a firm that helps companies advertise on Facebook

Jeremiah Owyang, an analyst at Altimeter Group, believes Facebook will not only collect more data, but expand its inventory of ad space by eventually serving ads to the websites offering Facebook's social networking features.

"This is definitely the precursor to a larger advertising opportunity," said Owyang, though he said it will take some time for Facebook to roll out the full panoply of ad features.

PRIVACY HURDLES

Facebook, which was started by Co-founder and CEO Mark Zuckerberg in a Harvard dorm room in 2004, makes money primarily by selling ads on the Facebook.com site. Its investors include Accel Partners, Microsoft Corp and Hong Kong tycoon Li Ka-shing.

As a private company, Facebook does not disclose its financials, though industry estimates for its 2009 revenue range from $500 million to $650 million -- still just a fraction of the nearly $24 billion at Google or the $6.5 billion at Yahoo Inc.

Facebook has sharpened its ad focus and hired some of the people who had a hand in developing Google's advertising network, including David Fischer, who joined Facebook as vice president of advertising and global operations this month.

"The more time that people spend away from Yahoo and Google, the more that ad dollars will flow away from Yahoo or Google," said Citigroup analyst Mark Mahaney, though he noted that Google's paid search business remains the most effective advertising tool on the Internet.

But before Facebook can transform its advertising business, it may need to quell growing privacy concerns. Four U.S. senators this week took issue with Facebook's automatic integration of user preferences with a trio of websites.

 

Privacy concerns have doomed previous attempts by the company to develop new forms of advertising, notably its 2007 Beacon project that published a person's online purchases to their Facebook news feed.

"Facebook has had these grandiose visions before and not all of them come to fruition," said RBC Capital Markets analyst Ross Sandler.

"When you talk about re-purposing or using consumer data, that kind of draws a red flag," said Sandler. Facebook and advertisers, he said, will need to tread cautiously.

Facebook spokesman Larry Yu said the Open Graph efforts will not bring about any changes for advertisers. "Facebook's ad policies remain unchanged. 'Likes' and interests from people's profiles are aggregated and, as they have always been able to do, advertisers can target ads on Facebook with this anonymous information," Yu said in an emailed statement.

Kevin Lee, the CEO of search engine marketing firm Didit, said social networking sites have historically proven to be challenging advertising environments, with consumers engrossed in interacting with their friends.

But with improved ad targeting and the potential for ads to appear on other websites, Facebook could play a much greater role in the ad industry, creating the initial demand for a product that eventually triggers a Web search, he said.

"I don't think it's going to displace it (search advertising), but it's going to be a great adjunct," Lee said about Facebook.

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