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Facebook’s New Virtual Currency is YOUR Reputation

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… by Dennis Yu

What do these 3 things below have in common?

If you guessed advertising, you’re only partly right, since one of the three items is an ad. If you guessed personalized results, you’re warmer, but missing the bigger picture. If you ventured that it’s Facebook’s attempt to mine you for all that you know and what you’re worth; you’re exactly right.

Facebook is a free service in the sense that you’re not paying a monthly subscription fee. It’s ad supported. Verizon charges me a few hundred dollars a month for service, which I’d gladly pay over listening to a 30 second ad every time I wanted to make a call. But Facebook chose to use ads, not subscriptions, to make a profit—yet Facebook users expect service as if they were paying customers.

These freeloaders who don’t pay also don’t realize how their activity continues to build value for Facebook’s advertisers. In this article we’ll explore the mechanics behind this system and why Facebook’s revenues will outstrip Google’s in less than 3 years (provided they have no major privacy bumbles).

Let’s start here: Any information you reveal about yourself on Facebook you can pretty much think of as information you’re handing over to advertisers. Sure, there are privacy settings, but do you know of anyone who actually unchecks the pre-checked box to have personalized ads served to yourself and for your image and name to be included in ads? I consider myself more knowledgeable about the platform than the average Facebook user, and even I’m not sure if it’s fully possible to opt out of things like Sponsored Stories.

Sponsored Stories work tremendously well for advertisers. They should, since these ads show you pictures of YOUR friends, creating the ultimate high school cafeteria, enquiring-minds-want-to-know, rubbernecker situation. Who doesn’t want to keep up with what their friends are doing?

Recently, Sarah Bird, the chief legal expert for SEOmoz, and I had a discussion about whether this is okay. If I’m a fan of SEOmoz, and Facebook uses my image to help SEOmoz, a Facebook advertiser, get more fans— doesn’t that mean SEOmoz is benefiting from my endorsement without asking me for permission? What if the advertiser is not even aware that they are achieving stellar results because of this technique? Is this Facebook’s fault or perhaps no one’s fault at all? What if the profile pictures of 13 year olds are being shown to all sorts of people without parental consent in the United States or other countries that have varying privacy laws?

Before you brand me as a privacy shrew or Facebook hater, let me tell you that I don’t think there’s a significant problem here, and there won’t likely be a problem. Here’s why:

  • People routinely sell their information for almost nothing:

    Give up your email address to earn 5 Farm Dollars? Sure! Sell out 10 friends to get 20 coins in some silly game that has no real world value? Absolutely! How about join an airline loyalty program or sign up for a supermarket rewards card? This has been going on for a long time. If you travel a lot like me, you know that many airports have “free” Wi-Fi that activates only upon you watching an ad. Don’t know about you, but I watch the ad versus pay $10 for 45 minutes.

  • We’ve been testing this for FOUR years inside Facebook:

    It was June of 2007 when Facebook released the F8 platform. To the best of my knowledge, it was our team that first came out with ads within Facebook that were personalized with user profile pictures and names. Facebook came out with Sponsored Stories only a few months ago, but arguably they have learned from what we did. If you remember back in 2007, Facebook’s own ad product, not our 3rd party ad-served unit, were those pesky “flyers”—basically static banner ads that had zero personalization and almost no targeting.

  • Advertiser gain doesn’t have to be consumer loss:

    This is not a zero sum game. Scott Richter, one of the pioneers of online advertising, tells me that spam is really just bad advertising. And I agree. Unwanted, irrelevant ads are like the yellow page books being dropped off at your door, killing who knows how many trees. That stuff on your doorknob or windshield when you get back to your car—that’s spam. But a highly targeted, interesting ad that highlights something your friend did—I would appreciate the recommendation, like a personal concierge of sorts.

  • Most users probably don’t know it’s an ad:

    Now this one is devious. How many blog posts or stock recommendation are written by authors with bias (think Michael Arrington of TechCrunch who writes about companies he has ownership in)? How about the free webinars that are put on by Google and Facebook for how to increase your marketing effectiveness—or even those little tips inside AdWords that keep recommending that you spend more money in various ways? Any content anywhere has hidden bias—even what’s in your News Feed, the super positive reviews posted by restaurant employees, or your comments about your friend’s cooking and whether that dress makes her butt look big. As an advertiser, you pay your email company to send emails on your behalf, so how’s that so different than paying Facebook to send messages to your fans?

Whether the delivery channel requires payment or not, is independent of whether that content is relevant and appreciated by the recipient. Some would argue that if the CPC advertisers pay is dependent upon Quality Score or CTR, that there is a built-in mechanism for good behavior. But we know of a plethora of big advertisers who spent millions on untargeted nonsense.

There is definitely a move towards more personalized, daresay more enjoyable, ads on Facebook. In the research study that we put out in January 2011, we observed that the average CTRs on Facebook were 0.051% in 2010. Some folks took this to mean that Facebook traffic was bad, as opposed to Facebook advertisers being unskilled in their methods.

Even today, the average marketer trying to create social ads is like shoving a bus driver into the cockpit of a fighter jet. They might have driven that bus competently for years, but they are going to need some training for this new vehicle that has so many more knobs to twist. And it’s no wonder that most Facebook advertisers crash and burn.

Last we checked, Facebook made $1.7 billion in 2010—let’s round that up to $2 billion for sake of simple algebra. And Google does about $30 billion a year. So right there, Facebook earns less than 1/15th of Google’s revenue.

Facebook also earns about 30 cents per 1000 impressions served (eCPM). It varies by country, device, and other factors, but we can use this number for now. And Google earns about $80—not 80 cents—per thousand queries. That means Google is 260 times better at extracting value.

Some search die-hards will jump in and say that search queries are more valuable because people were actively looking versus just goofing off when the boss isn’t looking. They will argue that search intent is more valuable than display because the conversion figures prove it. Several PhDs in statistics on staff will calculate it down to the 99%th percentile and 5 significant digits. But they might have overlooked the difference between demand generation and demand collection—and then the distortions that occur in last click attribution.

When marketers are able to give credit to clicks that are non-branded and not navigational, they’ll appreciate the value of word of mouth; which is what Facebook is.

The reality of advertising for us online marketers is that only a fraction of what influences purchase behavior is actually trackable via links and cookies. Marshall Sponder calls this the “ultraviolet” layer. It includes testimonials, peer pressure, TV advertising, and other things in the real world that don’t have pixels attached to them.

When advertisers realize this, and are able to assign value to these “assists”, and have tools that allow them to properly fly their jet aircraft, (punch in the destination, and the autopilot takes over,) then it’s possible that Facebook’s earnings could catch up to Google’s. Further, I believe that Google’s eCPMs will slide over time, as we have witnessed in any channel that matures, since advertisers will not be willing to count conversions that are actually navigational versus search. Maybe Google and Facebook could both meet in the $30 eCPM range.

The price of traffic MUST decrease from a pure economics standpoint. The growth rate in available traffic is outstripping the value of goods being sold, so mechanically this must be true. Unless you double the money supply overnight, a doubling of traffic globally because of more information across more devices on a more connected population gives each ad impression fractionally less value.

Watch as the waters equalize; with Facebook increasing their earnings with traffic being more valuable, and traditional search losing power, as advertisers are smarter about assignment of credit influence and demand generation.

Dennis Yu is Chief Executive Officer of BlitzLocal, a Webtrends partner that builds social media dashboards to measure brand engagement and ROI, specializing in the intersection of Facebook and local advertising. You can reach him on Facebook, Twitter, LinkedIn, his blog, or good old-fashioned email at dennis@blitzlocal.com. BlitzLocal is a leader in social and local advertising and analytics, creating mass micro-targeted campaigns. Mr. Yu is an internationally sought-after speaker and author on all things Facebook, and has been featured in National Public Radio, TechCrunch, Entrepreneur Magazine, CBS Evening News, and other venues.

Nikki Katz is the Managing Editor for the BlogWorld.com. She has been a freelance writer and blogger for over a decade, writing for About.com, iVillage and b5media. Feel free to follow her Twitter @nikki_blogworld and @katzni.


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