Big advertisers are Facebook’s new friends

By Jessi Hempel

A hush fell over a packed sixth-floor room this afternoon in a nondescript Manhattan warehouse as Facebook founder Mark Zuckerberg took the stage. “Once every 100 years, the way that media works fundamentally changes,” he said haughtily. So began one of the most highly anticipated launch events this fall as Zuckerberg unveiled Facebook Ads, a three-part strategy to help advertisers better connect to customers on the social networking site.

Advertisers can create free Facebook pages for their products and services, build SocialAds that pair display and text advertising with personal recommendations, and access data about how Facebook members use their products.

Building on its strong history of giving Facebook members control over their online profiles and retaining an uncluttered, highly structured look and feel, the company will let users select the advertising that will be displayed on their social networks, creating advertising inventory only in the network of fans that a brand builds virally online. No fans, no ads.

Here’s how it works: First, advertisers can create free pages that play host to the same interactive applications that Facebook members now download in their profiles. A product called Beacon will allow advertisers to display their fans’ activities on newsfeeds — a running update of friends’ activities on a Facebook homepage. For example, if a Facebooker chooses to become a fan of Saturn cars, that fact may appear in the newsfeed.

Second, Facebook announced SocialAds, display and text ads that are paired with interactions with Facebook members. For example, if a user named Jane Doe purchases a pair of Puma running shoes, her friend may receive a social ad — either running down the side of the page or in a news feed — that consists of a banner paired with a notice that “Jane Doe has just purchased a pair of Puma running shoes.”

Last, without revealing personally identifiable information about users, Facebook will provide analytics and reporting to advertisers about consumer behavior. “In a fundamental way, the Facebook Ad platform may change the way people view advertising,” says IDC analyst Rachel Happe. “A brand will have to earn the affiliation of its customers in order to have the opportunity to advertise to a broader network.”

Application developers will watch the system closely. “It does begin to move Facebook into application-specific domains such as iLike and Flixster,” says Jia Shen, CTO and cofounder of RockYou, one of the largest widget makers on Facebook. “Another aspect of concern is how the new types of newsfeeds, placements, and pages do begin to dilute the Facebook newsfeed. We don’t know how Facebook will control the frequency and priority of these new events, but it adds more to the already crowded newsfeed area to contend for space.”

Facebook Ads follows an Oct. 24 announcement that Microsoft (MSFT) will take a $240 million equity stake in the site, valuing Facebook at $15 billion. The company is private and does not disclose numbers, but it is widely reported that Facebook earned a profit of $30 million this year on $150 million in sales. With a $15 billion valuation, that translates into 500 times earnings.

Industry analysts have long wondered how the startup plans to make money. Until now, Facebook’s advertising opportunities have been limited to banner ads that run down the side of pages and smaller ads that appear in newsfeeds. Advertisers can also pay to sponsor groups. Facebook’s move today ups the ante in the fast growing area of brand advertising on the Web. Ad spending on social networks in the United States alone will reach $900 million this year, according to online advertising research company eMarketer. That figure is expected to jump to $2.5 billion by 2011 as advertisers move brand advertising dollars online.

Major competitor MySpace made two advertising announcements of its own this week. On Nov. 5, the Web site revealed new behavioral targeting efforts that will allow advertisers to reach even more specific audiences. If Universal Pictures was able to connect with MySpace users who say they liked movies, for example, the company will now be able to target people who identify that they like movies and also that they prefer horror films. The site also unleashed a self-service advertising tool for small businesses, bands and individuals.

Facebook’s new strategy is a welcome innovation, says Michael Barrett, chief revenue office for Fox Interactive Media, the Newscorp (NWS) division that oversees MySpace. “There’s a lot less competition with Facebook for real ad dollars than with the portals,” he says. MySpace’s advertising efforts are better spent trying to harness ad dollars directed at banner ads on sites like Yahoo (YHOO), MSN and AOL. His take? Any innovation on the part of Facebook will ultimately help everyone profit from social networks.

As of this afternoon, 100,000 new advertiser pages have gone live on Facebook. Logos of Facebook’s 60 advertising partner companies — including Blockbuster (BBI), CBS (CBS), Coca-Cola (KO), Sony Pictures Television (SNE) and Verizon (VZ) — flashed across the screen as Zuckerberg completed his address. Many advertisers don’t yet know what to expect. Jessica Jackley Flannery, co-founder of microlending site Kiva.org, says her colleagues anticipated so much traffic from Facebook Ads that they stopped to consider whether their site could handle it before signing on. “We were on Oprah a couple months back, and we survived the sudden spike then, but this could mean an even bigger gain.”