How Facebook Reaches Revenue Targets: Take on Google's AdSense Program

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It's been reported that Facebook is on track to bring in $2 billion in revenue this year. And that's a lot of money -- obviously. But it's nothing when compared to Google's $25 billion, even though Facebook, with 550 million users and climbing, will overtake Google as the most trafficked website in the world (if it hasn't already). So how does Facebook compete?

David Pakman, a partner at Venrock Associates who focuses on early stage venture investing in digital media and Internet companies, argues on his blog that Facebook will increase revenues exponentially in the coming years by focusing on virtual good sales and by competing directly with Google's AdSense program, through which partner sites receive a cut of revenues from Google-generated advertisements.

Facebook payments, with Facebook getting 30% of all virtual good sales, will generate several billion dollars a year once it is ramped. This can become a $4B revenue line for Facebook within three years. But the other often underdiscussed opportunity is an off-site socially targeted ad network.

We know from our investment in Media6Degrees that the most effective form of ad targeting after search is social targeting. These are ads that are targeted essentially at the friends of a brand's existing customers. Your customer's friends show extremely similar brand affinities as you....

The issue for Facebook is that applying this advanced form of targeting on their site would be uninteresting, owing to the lack of performance of advertising on social media. This is where Facebook Connect comes in.

Already, more than 2M sites have implemented Facebook connect. I believe what Facebook will do is to offer to every one of those sites essentially an AdSense replacement. Pull out your AdSense ads and replace them with socially-targeted Facebook ads. When a friend of a brand's existing customer appears on a publisher's site, they can see ads for that brand. I believe these results will perform considerably better than AdSense's contextual/semantic targeting and hence provide publishers with larger payouts than Google provides them. Facebook already has the large social data set to understand the connections necessary for this targeting. Of course, this will further encourage more sites to implement FB connect and Like buttons, since FB can make these requirements to be in the social targeting ad network.

Read the full story at Pakman's Blog: Disruption.

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Nicholas Jackson is a former associate editor at The Atlantic.

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