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Summary:

Included in the changes that Facebook recently announced to its privacy and governance policies was an admission that it aggregates and shares data on user activity with advertisers — and Facebook says it plans do so not just inside the network but on external websites as well.

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There’s been a lot of discussion over the past few days about the recent changes to Facebook’s privacy and governance policies — including the revelation that (gasp!) Facebook is not actually a democracy — but one element of the new rules has gotten less attention than it probably should: namely, the fact that the giant social network is going to use the data it has about your likes and dislikes to show you ads outside of Facebook. This is the first real confirmation that the company is going to roll out an advertising network that extends beyond just its own walled garden, and it could turn out to be one of the biggest factors in the success or failure of Facebook’s revenue-growth strategy.

It’s true that the network wants to do away with the voting process that it implemented as a way of improving its governance policies, which required it to get 30 percent of its users to support something before it could make a significant change. But this approach was mostly a failure before it could even get started, since the last vote the company held saw .03 percent of users participate — and as more than one person has pointed out, getting 30 percent of Facebook users to vote would mean 300 million people, which is more than twice as many as voted in the recent federal election in the United States.

Soon, Facebook ads could follow you around the web

In any case, the company has other goals it needs to meet first, and one of those is generating enough revenue to make Wall Street and other investors happy with its $50-billion market capitalization. And that has put a lot of pressure on Facebook to come up with a winning mobile strategy, among other things, since its clickthrough rate for traditional ads is abysmal.

Sponsored stories (which have been criticized in a number of jurisdictions, and could become illegal soon in Norway, according to one recent report) are one way of trying to solve that problem. An external advertising network — one that uses information about users and their activity on Facebook as a way of targeting external ads on other websites — is another way. Chris Dixon, the Hunch founder who just became the newest partner in Silicon Valley venture-capital firm Andreessen Horowitz, has described this as an “embedded option” for Facebook investors, meaning it could stand to significantly enhance the company’s financial prospects if it is handled properly.

“An external ad network is inevitable. Google proved this model with Adsense. With an already huge base of advertisers bidding on CPCs, it is impossible for most other ad networks to compete on publisher payouts. But Facebook’s traffic is so great now that an external ad network might increase their revenues by 2x or so.”

To put this in perspective, if an external ad network did manage to double Facebook’s revenues, that would take them to almost $10 billion a year from their current level of about $5 billion. Theoretically at least, it could push them even higher if Facebook manages to attract enough advertisers with its targeted data.

Your activity on Facebook = ads outside of Facebook

There have been hints that the company was planning to roll out such a network: earlier this year, Facebook experimented with sponsored stories on Zynga’s website that were governed by the data that the social network had about users based on their activity inside Facebook. And the company also provided a preview of the latest changes in May, although most of the attention at that time was focused on the privacy implications. Now it has become even more obvious that an external ad network is the goal — and Facebook’s Chief Privacy Officer said as much in a comment to Forbes magazine about the new rules:

“Everything you do and say on Facebook can be used to serve you ads. Our policy says that we can advertise services to you off of Facebook based on data we have on Facebook.”

As Quartz points out, the first outcome of this new approach could be the introduction of ads into Instagram, which was acquired by Facebook earlier this year for $735 million. But the social network is sure to extend that to other websites and services it could partner with — if only because the kind of data that Facebook has on user behavior (even though it is anonymized) is one of the biggest potential treasure troves of ad-targeting that exists online. Access to information about the browsing and liking habits of a billion people isn’t something that comes along every day.

Google has built a multibillion-dollar advertising business around showing people relevant ads while they search, and so far nothing has been able to match the effectiveness of that approach. But if Facebook is able to target ads on external websites and services based on the data that it has, we could see one of the first major challenges to Google’s ad dominance.

Post and thumbnail images courtesy of Flickr user Balakov

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  1. Nice, I expect to see a better attempt at expanding Facebook advertising than the attempt to go social with Google+

    1. G+ is FAR more social and built around social behaviour than Facebook. Just look at basic functionalities like conversing with people outside your friends, which isn’t even possible on Facebook. It’s like shouting at a market when you try to have a public conversation with someone on Facebook’s “pages”. You can’t quote, notify or in any way get the attention of the person you’re trying to have a conversation with WITHOUT friending them. That’s not “social” at all.

      1. Definitely. All G+ needs is the people that other people join Facebook to hang out with.

    2. If facebook come with this google going to face a competition. Now its matter of time to see how facebook takes their step and how google react.

  2. Radford Castro Friday, November 23, 2012

    Google has to be concerned about this type of development. The search giant relies on 97% of its revenue on ads. If Facebook ads prove to be more effective and larger companies see a significant difference in sales, Google could be in trouble.

    1. yeahsure, “google could be in trouble”.

      think i heard this when they paid 1.5B for youtube and when they went public (sans wall street underwriters) at $60.

    2. I hope you’re joking. FB adds will NEVER be as effective in CORPORATE market. That’s all that matters. Google would buy them if they had to.

  3. David Johnston Friday, November 23, 2012

    External ads must generate clicks. That changes Facebooks ability to provide branding ads that deliver a message rather a call to action.

    To make it work they would have to find a way to make publisher websites more than Google Adsense.

    They still aren’t nearly as good at preventing fraud as Google which will be interesting to see how it plays out.

    1. Yep. There are plenty of ad networks other than AdSense. The trouble is that they all pay really badly except AdSense.

  4. Good, then they will understand that I loathe capitalism! Perhaps i will get few ads to BUY something!

  5. Time to dig out the hosts file again!

    Facebook following me around the internet even more is an uncomfortable thought.

  6. I just dont appreciate this at all.Where is our privacy? We will be sold to the highest bidder.This is not cool at all. Most people dont want the whole world to know what we want to buy or not buy.What will happen with our social security numbers and credit cards and history? If it happens many people will live without the Internet and never buy online anymore..I know that I wont.Some one has already help themselves with my money already after I bought something online and the interaction was between two sellers one found out that I was looking to buy a service the other grabbed the deal without my consent ;I only found out that I money was taaken out of my account because it was more expensive…

  7. san diego fiber installer Friday, November 23, 2012

    Finally its about time they increase revenues.

  8. Linked from my G+ stream, ugh. This disgusts me. I already knew that facebook was monitoring my activity even when Im not on their site but there is no way in hell I want these ads to follow me to other pages! Worst idea ever!!! Only reason I still have facebook is because some of my friends wont use other networks (g+, twitter) and I mainly only use their mobile app because I hate the targeted ad clutter on their webpage.

  9. The problem with ads on Facebook is they look terrible – hence CTR’s of 0.02% (my own experience). Extending beyond Facebook would open up much better performing IAB ad sizes… like the ones that get CTR’s of 5%? Why Facebook doesn’t put them on Facebook.com, is completely beyond me.

  10. TinyVox: Tape&Tweet Friday, November 23, 2012

    Mobile ads suck because CONTEXT is skimpy, which is what AdSense needs. FB has all the context it can get about a user, and is in a position to deliver ads worth clicking on mobile.

    1. Who is the go to guy/gal for best practice FB mobile ads? Are you saying that CTRs on FB mobile ads are going to be appreciably higher and will this also extend to ipads?

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