Facebook has the potential to change digital advertising as we know it. However, Facebook’s recent revenue from advertising hasn’t equaled their recent growth estimates, as many people who bought into their IPO have sadly discovered.
“The key is in a single idea, and Facebook is singularly able to deliver on it: SELL RELATIONSHIPS, NOT IMPRESSIONS,” writes Ben Elowitz. “The first 100 years of brand advertising was built on the paradigm of a captive audience with interruption advertising in TV, radio, print, and online. That created a $540 billion market to reach a mostly-right audience at the mostly-right time, with a sometimes-right message delivered via occasionally-great creative. The basic idea being that if you reach those people with enough frequency and decent creative, they’ll eventually hear your message. But never, ever, ever has any brand had an advertising platform that could create a relationship with a consumer before she makes a purchase… until now.”
The ability to sell relationships, not just impressions, puts Facebook on a higher plane than most websites. Elowitz advises Facebook not to open itself to extensive banner ads like MySpace did, because that reduces the value of the site’s advertising.
“By creating truly original ad products that have no comparables in the market, Facebook will be able to create and sustain its own price point,” said Elowitz. “And because Facebook is the only game in town when it comes to selling consumer relationships at full scale, they have a lock on that market. Scarcity of sources with huge reach and a product that cements relationship for life could be a killer combination.”
Google currently dominates the direct response advertising market with AdWords and AdSense, forming a direct link between the cost and value of an ad. Facebook, however, has a chance to be the king of brand advertising, which could be many times the size of direct response advertising.
“What’s more, advertisers have been pent up, waiting to invest in brand advertising on the web,” said Elowitz. “To date, they’ve allocated only 40 percent of their online ad spend to branding, even though more broadly brand advertising garners 90 percent. As a relationship broker, Facebook is the one who can convince them to spend. Just as Google proved the value of direct marketing online, Facebook can prove that brand relationships can be built more effectively on social media than through any magazine spread.”
Smart magazine advertisements can convince viewers that they are part of the content. Online ads, however, are seen as the price users must pay for free content, and some brands like Hugo Boss and Louis Vuitton see online advertising as an image liability.
“Facebook is poised for this challenge. Zuckerberg has always put the user experience forever ahead of revenue today,” noted Elowitz. “He knows better than to devalue the audience’s experience with advertising products that serve advertisers while frustrating users. No doubt advertisers – not to mention Wall Street investors – will continue to be annoyed by their second-class status in the short term, but Facebook’s unyielding focus on user experience will serve all their constituencies well in the end.”
Facebook has very valuable data from its 900 million users. Still, the social network has smartly kept user data scarce to advertisers, which will benefit them in the long run.
“Even in the most recent FBX announcement (an enhancement to its least valuable form of advertising), Facebook kept their own dataset out of it completely, allowing use of third-party data only. When it comes time to sell, or more realistically, lease, that data, Facebook will do it with tight controls and at a huge premium,” added Elowitz. “Remember: the media industry was once robust and profitable. What was different then The targets were the same, but the ways to reach them were fewer.”
One of the biggest opportunities for Facebook down the line is offering the above services to other publishers on the web. By potentially using Facebook’s data to inform their advertising it could both benefit the advertisers and put more value back into Facebook and increase their revenues to boot.
“This is a huge opportunity for the entire digital media industry. Online advertising has become a commodity (thanks, Google!). Facebook is digital media’s one best hope to reverse that trend and make online advertising more valuable than offline advertising by tenfold. Google took direct marketing and made it extremely efficient, allowing advertisers to spend less. Facebook has something to sell that might actually make advertisers open their wallets more: a magic brand relationship machine that far exceeds the value of transactional clicks. Wall Street would much rather that Facebook ignored the five rules above, because Wall Street wants profits now. Facebook wants profits forever. May the latter prevail,” concluded Elowitz.