How Facebook Will Upend Advertising

The guessing games over Facebook's worth are back on again. They were reignited by the news on May 26 that Facebook has accepted a $200 million investment that values the company at $10 billion.

Much of the discussion centers on the ability, or lack thereof, of Facebook and other social networks to sell advertising and deliver advertising results. People get on Facebook to socialize, not hunt for products—or so the argument runs.

But that argument misses the point. The question isn't how advertising will work on Facebook but rather how Facebook and social networks like News Corp.'s (NWS) MySpace are changing advertising. I'm loath to affix the 2.0 moniker to yet another phrase, but if ever an industry needed to be 2.0-ized, it's advertising.

Almost a century ago, retailer John Wannamaker is reported to have said: "Half of all advertising works, I just don't know which half." Today the percentage may be far lower. On the Internet, click-through rates have fallen precipitously as clutter has replaced clarity. These days an ad has performed exceptionally well if at least 1 in 10 people who see it click on it. Much of the time click-through rates that once approached 3% are more like 0.3%.
The Holy Grail of ads: word of mouth

The good news is that we're on the verge of a major rethinking of advertising's fundamental premises. One of the biggest challenges facing advertisers is ad credibility. Consumers typically rate advertising as their least credible information channel. However, businesses have continued to invest in advertising because they could compensate for the lack of credibility through broad distribution and high-impact messaging.

Today that trade-off is being turned on its head. Word of mouth—peer opinion—has consistently been rated the most credible source of information. But traditionally there's been a limit as to how widely you could distribute a friend's point of view. Readers of a certain age will remember the Fabergé Organics commercial from the 1970s depicting a shampoo user who "told two friends," who in turn "told two friends, and so on, and so on." Three decades ago, telling a lot of friends wasn't nearly as easy as it is now.

Credibility now has a channel for mass distribution. It's called the Web and it particularly thrives in social networks. Such distribution will have profound implications for how we "advertise."

Obviously, we can use social networks to reach friends. But social tools woven into various sites can deliver the opinions and reviews of a group—"people like me"—whose views may be just as credible as those of my friends.

Say I'm a chief information officer. I may find the opinions of fellow CIOs I've never met every bit as credible as the ones I know—perhaps even more so, in that I'm less willing to denigrate the opinions of people I don't know. After all, I know the biases and shortcomings of the people in my friendship circle.
deploying social maps

These tools are showing up in a variety of online destinations. Facebook's Connect and other similar technologies let people bring their social map with them as they traverse the Internet. Businesses have to be thinking about how they might incorporate the social map into the way they deal with customers and prospects. This is going to be huge—and the opportunities are immediate.

I'm a big fan of Loomia's SeenThis application. While it was designed for Facebook, I actually "use" it elsewhere. You're probably familiar with the boxes on such newspapers sites as The Wall Street Journal that show what stories other readers have read. This "most read" designation rarely interests me. However, the Loomia tool gives me an additional box that shows me what stories my Facebook friends and groups have read. Generally I end up clicking through on most or all of those articles. The "recommendation" from my peer group is much more interesting and relevant to me than those of the general WSJ readership or editorial board.

In sum, social networks and related tools are transforming the way companies communicate with consumers and potential consumers in profoundly interesting ways. In this light, questions of Facebook's valuation are at best mildly amusing to me. If, as I suspect, Facebook is at the vanguard of transforming how companies reach consumers, $10 billion will some day seem laughably small.

Now it's up to the advertising industry to get its collective head out of the sand and exploit this transformation to its advantage.

(the article was originally published at http://www.businessweek.com/technology/content/may2009/tc20090527_635562.htm)