Following in the Footsteps of Giants
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Facebook (NASDAQ: FB) has been under a barrage of negative news since their IPO. They are facing lawsuits from unhappy investors, a dropping stock price and criticism that their advertising model does not actually work. General Motors made headlines when they pulled their 10 million dollars in annual Facebook advertising just before Facebook went public. GM claimed that they were not seeing the advertising results they needed to see in order to justify their continued advertising. GM is maintaining their Facebook pages and there have been rumors that GM simply wasn’t using Facebook ads correctly. The SEC has also launched an investigation into the technical glitches experienced on the NASDAQ trading system the day of Facebook’s IPO. Facebook also recently settled a ten million dollar suit regarding ‘Sponsored Stories’ that used Facebook user’s likenesses without their consent.
This has all somewhat faded into a background of negative news surrounding Facebook. The Sponsored Stories settlement is very small in the grand scheme of things. Coka-Cola's chief of marketing said recently that Coke likes Facebook’s advertising format and the SEC investigation is focused on NASDAQ not Facebook (though there was concern that Facebook and their underwriters did not give all investors the same access to financial projections). Beyond these headlines, Facebook has been making larger waves in the advertising world.
The first big announcement from Facebook was Facebook Exchange, a real time bidding platform for advertisers. Facebook Exchange is similar to the real time bidding model Google (NASDAQ: GOOG) and other large online advertisers use. Facebook Exchange will let advertisers target certain Facebook users based on their web history. This means that in real time advertisers can purchase targeted personal ads for the exact people they want to. Last year real time display ads generated over a billion dollars in ad sales. IDC projects that by 2015 they will account for over 5 billion in ads sales and will make up over 25% of all display ads sold. Facebook Exchange will launch in the coming weeks and could greatly boost the sell through rates of the ads on Facebook. Facebook Exchange also shows that Facebook is committed to increasing the effectiveness of their advertising based business model. This model brought in over 3 billion dollars in revenue last year and could soon challenge the internet’s largest advertiser, Google.
The second big move that Facebook recently made in the advertising world was placing ads on Zynga’s (NASDAQ: ZNGA) website. Zynga and Facebook have long had strong relations. At the time of its IPO, 90% of Zynga’s revenue came through games played on Facebook and 12% of Facebook's revenue came from Zynga games. These ads on Zynga's website mark the first time Facebook has placed its ads on another website. This is a big step for Facebook; a move like this could signal that Facebook is flirting with the idea of launching its own advertising network. Facebook has stated that it does not share any information about users or advertisers with Zynga. The potential is that Facebook will go head to head with Google’s hugely successful ad network, Adsense. In 2011 Facebook became the third largest online advertiser, and they did this just through selling ads on their own site. They did not sell any ads on others sites as Google, Yahoo, Microsoft (NASDAQ: MSFT) and others do.
Facebook has yet to monetize at all from their mobile users, which now account for over half of all Facebook usage according to comScore. Building an ad network could have huge ramifications for web based and mobile ads. This is because Facebook knows a huge amount about its users from their activity on Facebook. Combine this with tracking cookies that give Facebook more information about user’s web activity; and Facebook could be better placed to sell targeted ads than any other company. Real time ad sales through an external ad network could revolutionize Facebook's revenue.
On mobile, an Ad network could allow Facebook to compete with Google’s mobile ads which they have been pushing since they acquired AdMob. Apple also has its own mobile ad service though iAds, on iOS. Both of these ad platforms are limited in their ability to target ads because Apple and Google both have more limited if any social information about users.
With 900 million active users and Google as a model for how to build a successful company out of advertising, other online advertisers, especially Yahoo! and Microsoft should be worried. Google has its struggling social network Google +, which they have been pushing their users into adopting. However Yahoo! and Microsoft both lack almost any social data about users with which to better target advertising. This puts them at a disadvantage compared to Facebook and Google. An outside ad network has long been rumored from Facebook and could provide Facebook with the boost in revenue they need while they work out how to monetize mobile.
ded004 has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook, Google, and Microsoft. Motley Fool newsletter services recommend Google and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.