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Next time you sign in to Facebook, take a look at those three or four little ads on the right side of most of the pages. Do they mean something to you?

One might be for a wedding photographer, another from a political candidate, another for a company offering to publish your book or trying to sell you sleeping supplements.

Chances are that at least one or two will be targeted to the activities and interests you post on Facebook, or the city you live in, your gender, or even your relationship status. These little ads are typically purchased through Facebook’s “self service” system, which enables small- and big-time advertisers to create an ad in minutes to lure specific demographic groups with a few lines of text and a graphic or photo.

Rather suddenly, these little come-ons have turned into the leading source of Facebook’s revenue. As an analyst at eMarketer, the New York-based market research firm, I have estimated that self-service ads account for at least half of Facebook’s total ad revenue, projected to be $1.3 billion this year. That’s way more business than anyone could have expected, given that there are no up-front charges for placing these ads and that Facebook earns revenue only when viewers click on them or when a certain threshold of impressions is reached.

Of course, Facebook isn’t the first Internet company to make a bundle selling ads without salespeople. By design, its system is similar to buying paid search advertising through Google’s AdWords or AdSense programs, which combined to bring in north of $20 billion in revenue last year. But this time marketers aren’t targeting ads on the basis of your search terms or what you are currently doing on the Web but on the basis of exactly who you are, as revealed by the information you’ve disclosed to your Facebook friends.

Facebook’s self-serve ad platform raises privacy concerns, given the ongoing scrutiny of how the company’s customer data is used. Facebook already finds itself in hot water over recent reports about personal profile data potentially being misused by some of the most popular third-party games and applications.

But for advertisers, the sense of intimacy is precisely the allure. “Everyone [on Facebook] is volunteering their information,” says Hussein Fazal, CEO of AdParlor, a startup that manages Facebook advertising campaigns for social-application developers. “They’re saying, ‘Here’s my actual age; here’s my actual gender; here are my actual interests.’ To have the ability to advertise and target to these users who have voluntarily given accurate information is very powerful.”

Tim Kendall, director of monetization at Facebook, puts it this way: “It’s a people-targeting ad system, and that just doesn’t really exist anywhere else.”

It’s hard to believe that the social-media advertising revolution, at least thus far, is the work of ads that shout “Have new shoes delivered to you every month!” or “Having trouble sleeping?” But what Facebook has built points directly toward the way much advertising will be bought in the coming years: without any human intervention.

The system launched in 2007 and started building slowly. But this year, tens of thousands of advertisers are on board, from local bakeries and state tourism offices to online game developers and major consumer brand marketers.

“The advertisers who have found success and continue to have sustainable success [on Facebook] think about us fundamentally differently than paid search,” says Kendall. “When people try us, they need to think about [the fact] that we generate demand, as opposed to fulfilling it.”

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Credit: eMarketer

Tagged: Business, Business Impact, Facebook, digital marketing, Zynga

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