Wednesday, February 8, 2012

Online Social Advertising: Why Facebook is Worth $100 Billion

Drive down a highway for a few miles. Listen to the radio through a few songs. Watch television for a few minutes. Fire up a web browser and check out a couple websites.

Chances are, if you do any of the above actions, you'll encounter at least a couple ads. This is nothing new (while some of the claims lack proper sources, Wikipedia claims that archaeologists have found sales messages written on papyrus in ancient Egypt and painted on walls in ancient India as early as 4000 BCE). Nor is it particularly surprising--consumers have money to spend, producers have products to sell, and advertising offers a reasonable way to connect the two, allowing all parties to come away from the deal a bit better off than before. What has changed over time, however, is the ability to target advertising. Every technological advance brings with it a new way to focus on the audience a company wants to persuade.

Consider the examples listed above. A roadside billboard has no dynamic targeting whatsoever; the only targeting it can possibly have is geographic, based on the traffic that passes the roads where it rests. Radio and television ads reach every member of their audience, which adds a slightly greater targeting power--we can now aim based on what music or shows are being played, so we have some rudimentary personality/taste targeting. Still, there is no fine-tuning available. In the early days of the Internet, advertising offered similar features to television advertising: websites would display (essentially static) ads, and then all users of a particular website would see them, allowing per-website targeting.

This is why Google's ad products were revolutionary when they were first introduced. For the first time, practical advertising was not really limited by the place the ad was located; rather, we could target based on the user's search queries and behaviors, bringing forth a new age where each user's ads experience was actually different. This model has since been duplicated by various online companies, but Google still holds a very large market share, which drives a huge portion of Google's profits (2011's pre-audit figures show that $36.5 billion of Google's $37.9 billion annual revenue came directly from ads).

Now, a new system is building up and entering the fray, promising yet another revolution. The new contender, of course, is Facebook, the social networking site that has grown to be unbelieveably popular. This popularity has endowed the site with an unrivaled resource for advertising: virtually limitless data for every individual user, plus the connections between them (in other words, the social graph). With Facebook ads, companies can choose to target people based on geographic location, age, gender, level of education, political views, hobbies, workplace, and more. Better still, the amount of organic content existing in Facebook's servers provides ample context to show ads (Facebook's "Sponsored Stories" program permits companies to leverage the social graph for suggestive selling; if your friend clicks Like on Coca-Cola's page, this allows Coca-Cola to target you by prominently showing your friend's interaction with them). This amount of customization would have been impossible just a few short decades ago, but with the help of web technology, it is now a reality.

With the rise of the social web, advertising has finally evolved from its coarse roots into a fully personalized market, with no two users having the same experience. The technology is still young, and still has its issues, but it is surely here to stay, and it can only improve. If Facebook's massive valuation is any indication, the business world has already embraced the rise of a new power in the world of ads: online social advertising.

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