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The Fischer King: David Fischer, Facebook’s vice president of advertising, wants to sell marketers a new, social kind of ad.

Three years ago 1-800-Flowers, long a pioneer in Internet marketing, became the first national florist to create a fan page on Facebook. It used the free page to build relationships with customers and sell selected products, but it spent very little money advertising on the site. In January, however, the company began buying a different kind of Facebook advertisement. “Sponsored stories,” as they’re called, let marketers pay to turn actions people take on Facebook into promotional content. When members click a thumbs-up button to signal that they “like” a product or brand, for example, a simple ad appears on their friends’ pages: “Julia Smith likes 1-800-Flowers.com.” Those friends can click a Like button on that ad, which then shows up on their friends’ pages, and so on.

Thanks in part to those ads, the company now has more than 125,000 Facebook fans, more than twice as many as it had at the start of the year. Now, says 1-800-Flowers president Chris McCann, “We look at Facebook as core to our marketing program.”

So do dozens of other major brands, including Ford, Procter & Gamble, Starbucks, and Coca-Cola. Suddenly, large companies are running multimillion-dollar ad campaigns on Facebook. Startups, such as the social-game maker Zynga and the daily-deal service Groupon, are mounting similar though smaller campaigns, and so are hundreds of thousands of local businesses, such as fitness salons and photographers. Facebook ads hauled in nearly $2 billion in revenues last year, according to the business information service eMarketer, and a leaked document belonging to investor Goldman Sachs revealed that the privately held company made a profit of about $500 million in the same period. This year, revenues are on track to reach $4 billion—making the $75 billion valuation investors are placing on Facebook seem slightly less crazy.

It’s a stunning performance for a company many observers thought would never make much money, let alone become a major force in advertising. (We were wrong, too. See “Social Networking Is Not a Business,” July/August 2008.) But cofounder and CEO Mark Zuckerberg and his ad executives are just getting started. Chief operating officer Sheryl Sandberg and David Fischer, vice president of advertising and global operations, intend to create something quite different from the two dominant types of advertising online: the search (or keyword) ads on Google and the display (or banner and video) ads everywhere else on the Internet.

Most of the ads on Facebook today—little rectangles running down the right side of the page, each holding a tiny image and up to 160 characters of text—barely hint at the huge bet Sandberg and Fischer are making. Facebook aims to be not just a place to advertise but an entirely new way to advertise—one that uses the power of social networks to create and amplify brand messages. In essence, the company is pushing a highly charged version of word of mouth, long seen as the most valuable of all marketing because people view friends’ recommendations as more credible than marketers’.

Conventional word of mouth reaches only a limited number of people. Facebook, where each of an estimated 600 million active users is connected to an average of 130 friends, changes all that by lending personal recommendations enormous reach. After all, anything a user does on the site can be broadcast automatically to all that person’s friends. “This is in many ways the Holy Grail of marketing: making your customers your marketers,” says Sandberg, who joined Facebook in early 2008 after building up Google’s ad sales operation from four people to 4,000. “For the first time, you can do word-of-mouth marketing at massive scale.”

To put it another way, when we use Facebook we no longer just view the ad; we become the ad. It’s a notion that disturbs some people, especially as Facebook continues to challenge social norms about privacy and use of personal data. Indeed, one reason advertisers love Facebook is that ads can be precisely targeted to specific audiences on the basis of their stated interests, location, “likes,” and much more. “A lot of data is being harvested and monetized by Facebook and its advertisers, but users have no idea,” says Jeff Chester, executive director of a nonprofit digital-marketing watchdog called the Center for Digital Democracy.

Zuckerberg believes that these new, more personal forms of marketing are the only way advertisers can adapt to the increasingly social nature of the Internet. On average, users spend more than six and a half hours a month on Facebook, significantly more time than they spend on other major sites—mostly because they are so engrossed in communicating with their friends. There’s an implicit contract in social media that people not be interrupted by commercial pitches, just as it would be inappropriate to start hawking Tupperware without warning at a dinner party, suggests Ted McConnell, a former longtime P&G marketing executive who’s now executive vice president of digital for the Advertising Research Foundation. This means the attention-­grabbing kind of image-based advertising that still dominates television, magazines, and even major websites could be an artifact of one-way broadcast media—which is to say, all media that preceded the Internet.

Second Act: Sheryl Sandberg, Facebook’s chief operating officer, joined the social-networking company from Google, where she ran its advertising business. Her goal is to build Facebook’s ad business into something equally innovative.

On the Internet, not only can consumers talk back to advertisers, but they can talk to each other about products, services, and brands. Ford sought to harness that kind of activity last year when it unveiled its 2011 Explorer sport utility vehicle not at an auto show but on Facebook. “We wanted to avoid the traffic jam of the auto shows,” says Scott Monty, Ford’s head of social media. The company put up a teaser page on Facebook, with videos, photos, a sweepstakes to win a car, and, on the day of the “reveal,” live chats with CEO Alan Mulally and other executives. And it ran ads on Facebook encouraging people to “like” the Explorer. The result, according to the auto-website network Jumpstart Automotive Group: the share of SUV shoppers on Jumpstart sites who researched Fords jumped 52 percent, more than triple the increases other automakers saw after spending $2.5 million apiece on 30-second televised Super Bowl ads.

Shiny new object

What sets Facebook apart from online rivals, especially Google, is that its advertising is aimed not at influencing immediate purchases but at branding, something online ads have never done very well. “We’re not really demand fulfillment, when you’ve already figured out what you’re going to buy—that’s search,” explains Sandberg, bounding up to a whiteboard to circle the bottom of a classic “marketing funnel,” representing the stage at which a purchase is completed. Circling the top half of the funnel, where consumers become aware of brands and consider buying their products, she adds: “We’re demand generation, before you know you want something.”

If she and Fischer can deliver on their plans, Facebook could capture significant chunks of the $500 billion advertising market from television, now the dominant medium for brand marketing. Dwayne Chambers, chief marketing officer at Krispy Kreme, for instance, recently told Advertising Age that Facebook, where the doughnut company has more than three million fans, now looks like a more attractive place to advertise than TV.

It surely won’t move all its ads there right away, though. A lot of Facebook’s current advertising is anything but revolutionary. For one thing, even Facebook concedes that most of the ads aren’t yet very social. They may promote a brand or provide a link to a brand site, as other display ads do, but many still don’t carry friends’ recommendations or even a Like button. What’s more, many of the ads aren’t even used for branding; they merely try to get people to play a game or fill out an e-mail registration. Facebook’s ability to target audiences according to their interests and site activities makes these ads attractive enough to direct marketers, but it’s hardly unique: advertising networks run by Google, Yahoo, and others distribute similar ads to targeted audiences on thousands of websites.

Another challenge is that very few people click on Facebook ads. The analytics firm Webtrends recently estimated that these ads on average draw clicks only once every 2,000 times they’re viewed—about half the industry average for display advertising. Though ads with a friend’s name attract more clicks, the performance is still nowhere near that of Google ads, which on average get a click for every 50 times they’re viewed. That’s mostly due to the nature of search ads, which are served up to people who have often signaled their readiness to purchase with the very words they type into the search box. But the inescapable result is that Google still grossed more in a month in 2010 than Facebook did all year, even though people spent more time on Facebook.

Right now, many advertisers are embracing Facebook anyway—the returns are good enough, and they don’t want to be left behind. “Social media is the shiny new object,” says Jascha Kaykas-Wolff, VP of marketing for Involver, which supplies technology to help brands manage their social-media presence. But other advertisers remain wary, and for good reason. Advertising on social-­networking pages means relinquishing a lot of control. An ad might be displayed alongside pictures of a college kid getting wasted, or a “sponsored story” on Facebook might turn out to republish negative feedback from a customer. “Buy an ad—you don’t get to write it,” Sandberg says, laughing at how such a pitch must sound to advertisers. Some marketers also want to be more creative with their ads than what’s permitted on Facebook, whose plain ad designs are intended to avoid annoying users. “I would like [ads] to be more eloquent and elegant,” says Seth Greenberg, Intuit’s vice president of global media and digital marketing.

If Facebook’s leaders hope to reinvent marketing in the age of social media, then, it’s clear they must still persuade marketers—as well as the people those marketers want to reach—that social marketing has real value. But its early efforts to develop this new form of marketing suggest how difficult this will be.

Social graphs: Facebook’s audience is growing faster than those of other popular websites. People have flocked to the site, partly at the expense of MySpace, which is part of News Corp.’s Fox Interactive group. As more people have joined the site, it’s become more useful. Now it accounts for about one-eighth of the time that people spend online.

Privacy debacle

On November 6, 2007, Mark Zuckerberg mounted a stage at a New York event space called Loft Eleven and declared, “The next hundred years will be different for advertising, and it starts today.” Engineers had been working day and night on a “completely new way of advertising online,” called Facebook Ads. Companies including Coca-Cola, Blockbuster, and CBS had already signed on. Advertisers would be able to set up free brand pages enabling people to become their “fans.” “Social ads” would combine actions posted by Facebook members, such as a purchase or a restaurant review, with the advertiser’s message. And a system called Beacon would post on the news feeds of a logged-in Facebook user’s friends whenever that user took an action on some 40 other websites, such as buying a movie ticket on Fandango or listing an item for sale on eBay.

People could opt out of Beacon on these individual partner sites, but that wasn’t enough to prevent a wave of outrage from privacy advocates and users. Some were furious, for example, to find their gift purchases broadcast to recipients. Coke, among other advertisers, quickly bowed out of Beacon. Within a month of the announcement, Zuckerberg apologized and changed the system to give users more control over how their actions were tracked. But the fallout was a big blow to Facebook’s strategy of using participants’ activities to target ads. Although Facebook’s revenues would hit $300 million by the end of 2008, according to published accounts, they were dwarfed by those of its rival MySpace, whose banner ads and flashy home-page takeovers were widely estimated to have grossed $600 million.

Nonetheless, Facebook kept focusing on ads that tapped its social graph, the term Zuckerberg used to describe the way relationships on the site could be mapped. It even gave users a chance to click thumbs-up or thumbs-down buttons on ads. In August 2008 the company launched “engagement ads,” which prompted users to comment, sign up as a Facebook fan of the advertiser, or take part in a poll; those actions would show up in friends’ news feeds. Those ads were slow to catch on, but in 2009 Facebook added other features for marketers. Among them was a new design for brand pages that made them look more like user profile pages—implicitly turning brands into peers.

These efforts increased Facebook’s appeal to marketers without antagonizing users. After attending a January 2010 meeting between venture capitalists and P&G executives, David Hornik, a partner with August Capital, wrote that P&G had come to view Facebook as a “must-have for digital advertising and brand building” for which it was “willing to pay dearly.” The following month, in a powerful sign that Facebook was putting all its chips on social ads, the company not only ended its three-year-old banner-ad deal with Microsoft but announced that it would stop running generic banner ads, saying that “ad formats that feature social actions perform better and provide a better user experience.”

Now that advertisers were warming to Facebook, the company needed to build up its sales operation, and fast. So in March 2010, just as it overtook Google as the Web’s most visited site (according to the market watcher Hitwise), the company hired Fischer for its top sales job—luring him away from Google, where he had been Sandberg’s deputy and then her successor. One key task: attracting sales talent to Facebook’s famously geeky culture. Fischer has since expanded international offices and brought the company’s sales force to more than 500 people.

Meanwhile, that April Facebook made its most ambitious attempt yet to spread its vision: Zuckerberg announced Open Graph, a set of technologies that he called “the most transformative thing we’ve ever done for the Web.” Open Graph would integrate other participating sites with Facebook in an entirely new way. In particular, the company revealed that it was making the Like button available to any other site that wanted to add it; a page a user “liked” on any of those sites would generate a link to be shared with friends in that person’s Facebook feed. Logged-in Facebook members arriving on a site like CNN would be able to see which stories friends had enjoyed. The personalized music service Pandora would be able to take the songs and bands a user had “liked” into account when making recommendations. Meanwhile, the things users did on those sites would be fed back into Facebook. The universal Like button has since become the centerpiece of Facebook’s plans to make marketing more of a conversation between brands and consumers (see TR10: Social Indexing).

By summer, Facebook’s user base had reached 500 million and its number of advertisers, the company said, had tripled in 18 months. Many of those advertisers were small, but that is not necessarily a bad thing; Google’s ad network was built on small and medium-size businesses that like its cost-effectiveness. On Facebook, those businesses can now afford to place branding ads more efficiently. Says Fischer: “We’re bringing brand marketing to a much broader set of marketers than was ever possible before—expanding that top of the funnel.”

Demand generation: Despite explosive growth, Facebook’s revenues are not yet comparable to its rivals’.

To underline what Facebook could do for traditional brand marketers, in September Sandberg addressed an audience of marketers and agencies at a New York conference hosted by an online-ad trade group called the Interactive Advertising Bureau. “The social graph,” she said in an expansion of Zuckerberg’s definition, “is not just connections between people but between people and the things they love.” Give people a chance to help shape your brands’ products and image, she said, and they’ll view ads as useful, engaging content, not commercial interruptions.

She came armed with figures from Nielsen, which had worked with Facebook over the past year to compare the impact of Facebook social ads and standard ads in the same campaign. In one study of 14 campaigns, Nielsen found that people who viewed ads displaying a friend’s endorsement were 68 percent more likely to remember the ad than were people who saw a plain display ad. What’s more, they were more than four times as likely to say they intended to purchase the advertised product.

Moneyball marketing
Despite Facebook’s momentum, doubts remain about whether it can persuade more big brands to open their wallets—a question that’s especially important given investors’ expectations. Maurice Lévy, CEO of the French advertising firm Publicis, told the New York Times this spring that he didn’t know if any business model that emerged from social media could be “as successful as people are expecting, or as successful as Google with search.” Moreover, the recession has forced brands to find cheaper ways to reach consumers—and social media is one of them. Sandberg cites company after company that has built brand value using Facebook pages and Like buttons. But, of course, those services are free.

Consider what Intuit did last year to promote its signature program, TurboTax. The company inserted a Like button in the application that users could click when they finished their taxes; about 100,000 people clicked either that button or the Like button on the company’s Facebook page. People who saw that a friend “liked” TurboTax were four times as likely to click on a link to the product as those who saw a standard display ad. Some 30 percent of those who clicked the link bought the program, and 79 percent of them were new customers. All great for Intuit—but the company didn’t pay Facebook for any of this.

“It’s really the Moneyball era of marketing,” says Cory Treffiletti, president of the San Francisco marketing agency Catalyst S+F, referring to Michael Lewis’s 2003 book about how the Oakland Athletics used player data to assemble a successful baseball team on the cheap.

One potential moneymaker for Facebook would be an ad network, which would syndicate its ads to other websites in return for a cut of the revenues they generate. Google’s AdSense network, for example, grossed $9 billion last year. But the company says it has no plans for an ad network. So Facebook’s biggest challenge remains coming up with new kinds of advertising that will appeal to both marketers and users.

Sandberg and Fischer admit they’ve not yet fully cracked that nut. If Facebook’s strategy of making us all willing marketers is to do the trick, the company will have to find a way to marry the science of the social graph to the art of the advertising it’s trying to replace.

Robert D. Hof, former Silicon Valley bureau chief for BusinessWeek, is a freelance writer in Palo Alto, California. His last Technology Review story, “Searching for the Future of Television,” appeared in the January/February issue.

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Credits: Gabriela Hasbun, Todd Heisler/Redux, Tommy McCall

Tagged: Web, Facebook, social networking, advertising, websites, social marketing

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