Andrew Chen

Click below for the full screen view of Facebook with huge ads

If Facebook is seeking a revenue model, let’s hope it’s not ads
There’s been a couple posts lately about Facebook and its revenue model, particularly this article on Venturebeat, written by Eric Eldon: In bid for international money, Facebook takes gifts off dollar standard. (There was also an earlier article on Techcrunch: Facebook May Be Growing Too Fast.) In either case, it’s absolutely indisputable that Facebook eventually needs to have a business model to be successful long-term.

Now up to this point, the company has tried a number of very social-network specific advertising such as:

• Facebook Pages
• Social ads
• Sponsored groups
• … and other ad solutions listed here.

These are all great, innovative products. I think it’s natural that anyone at a hot new company would primarily focus on the outputs that it could uniquely produce. That’s at the heart of differentiation and defensibility in the market

On the other hand, we have to consider what advertisers want, and ultimately, all these social campaigns at Facebook just aren’t the mainstream. Instead, this social media advertising gets grouped into “experimental budget” by ad agencies, which really control the purse strings in the brand advertising world.

What is experimental ad budget?
Typically, an ad agency is spending the bulk of its clients’ dollars on media they know performs. It used to be all TV, but we’re also seeing a lot of spend in search, buying premium spots on brand publishers’ homepages, etc. We’re often talking about 90%+ spend in these mainstream categories, and then a much smaller amount in experimental advertising.

Jeremy Liew recently referenced a WSJ article on experimental advertising which states that this budget is getting slashed as the recession develops:

In recent years, marketers have set aside a portion of their ad budgets to experiment with digital technologies such as Web video, mobile phones, gaming and virtual worlds. But with broader economic turmoil reaching Madison Avenue, these “experimental” budgets are among the first to hit the cutting-room floor.

Chrysler LLC has already slashed its experimental ad buys. With each ad dollar facing additional scrutiny, especially in the hard-hit auto industry, these ad buys will now make up about 5% of the auto maker’s marketing budget, down from as much as 10% in previous years, says Deborah Meyer, Chrysler’s chief marketing officer.

In good times, the maker of Chrysler, Dodge and Jeep brands tapped technologies like gaming and mobile to build awareness of its vehicles. “We won’t experiment in a lot of things that are fun to have. All of our dollars have to go to hitting in-market shoppers with the appropriate media,” Ms. Meyer says.

Areas like mobile, virtual worlds and widgets are expected to be hit particularly hard, as it remains unclear what kind of impact ads in these media have. These campaigns often reach a small number of people, and standard measurement systems have yet to be developed. “When we get into the need to drive results, you can’t spend money on the experiments and hope to keep your job and get your sales goals,” says Peter Kim, senior partner at Dachis, which advises marketers such as Philips Electronics NV’s Philips Healthcare and Johnson & Johnson on marketing strategies.

Jeremy also has two other relevant articles on this topic, Which online media companies will survive the ad recession? and New forms of advertising are hard. Both are worth reading.

Well, what do advertisers want?
The point is, advertisers are used to buying something very specific – they want IAB standard ad unit sizes, they’d like to do homepage takeovers and roadblocks, etc. And of course these are units that Facebook does not emphasize in their ad revenue process, because they are often annoying and obtrusive. Again, let’s take a look at ths mockup with the Facebook homepage covered with ads for the next James Bond movie.

Annoying, right?

I hope as an avid Facebook user that it never goes this far, yet as an online ad guy, I fear that’s what it’ll take to truly unlock the revenue behind Facebook’s pages, at least a long as it takes to convert the rather risk-averse agency community into building social media into their main budgets.

Given the frequent comparisons between Google and Facebook, it’s also educational to see how long it’s taken for the Mountain View giant to conquer the hearts and minds of Madison Avenue. Quite frankly, they haven’t been successful yet. That’s why after years of very aggressive talk about commoditizing the agency business, and making the entire ad buying process more efficient, you’re seeing Google account reps buying candy and otherwise sucking up to agencies. The article states:

Advertisers are grappling with the idea of Google, which spent many of its early years avoiding — and infuriating — advertising agencies, now shifting to embrace them. [...]

“We understand that maybe we haven’t been the best partner over the years,” said Erin Clift, the director of agency relations at Google.

Google could avoid ad agencies when it sold only search advertising, where it is dominant. But now that it has a wider set of products in more areas — including social media and virtual reality — it finds that it must work harder to drum up business, particularly because of the lingering hard feelings.

That’s right, 100B in market cap and they have to resort to bribing agency folks with candy! That is what is in store for Facebook’s efforts in trying to get brand advertising agencies to get excited about them.

Quick thought on an impending cultural revolution
I also want to point out that if this is what is in Facebook’s future, their culture is bound to look more like Yahoo than it is to look like Google. This is because ultimately, it means that technology will have very little to do with the success of monetization on Facebook, and instead it’ll primarily be centered around sales and marketing execution. These are the hallmarks of a media company that derives their primary revenue stream from brand ad agencies.

In fact, more complex technology and coining terms like “social graph” will only hurt, not help, in realizing the monetization potential around Facebook. What this means, unfortunately, is that there may be a subtle transition of power and emphasis from the super smart geeks who built Facebook and more into the hands of polished ad sales staff who can make money.

Every technology firm engaged in the ad network industry goes through this transition. It was true for the team at Revenue Science, and I’ve shared many conversations with Bay Area-based ad networks who figured out the key to their success was not algorithms, but happy hours with clients.

When will we know when Facebook starts prioritizing ad revenue?
OK, now all of this said, I think I’m making these predictions all too soon in Facebook’s trajectory. The fact is, Facebook is really not acting like they care much about ad revenues.

Here’s the checklist of potential actions that would tip off an intent in that direction:

1. Creating content categories or building out public spaces with focused content, which will give their ads more contextual relevance than just profiles (like a public blogging platform on top of Facebook)
2. Decreasing their international traffic, which is tough to monetize and costs just as much money, and/or de-emphasizing the amount of international traffic from their marketing
3. Allowing more standardized ad units, particularly high-end content like video, homepage takeovers, etc.
4. Taking strategic investment or otherwise strongly allying with a giant media company to take advantage of their brand advertising teams (Viacom?). This is to counter MySpace’s Newscorp resources
5. Emphasizing a specific audience for Facebook, at least to ad agencies and marketers, rather than trying to stay horizontal and representing their traffic as a giant gray neutral blob
6. Creating more opportunies for search, and/or integrating content or creating partnerships which try to increase the number of commercial searches on the site
7. Acquiring an ad network, not for the technology, but for the people – and appointing a brand advertising guy as Chief Revenue Officer
8. Stopping their clearly public Google envy and starting to think more like a publisher rather than a technology platform – perhaps this will be exhibited by less Google hires, or a very big splashy media hire, etc.

Anyway, those are some wild ass guesses! But if any of those happen you saw it here first.

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