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Can Facebook make profits in the advertisement industry?

For the past few years, Google has dominated the digital advertisement industry The algorithms that their engineers have designed to customize advertisements based on Google searches have not only been extremely innovative but also extremely lucrative. Google earns about $40 billion in revenues annually only from advertisements. Facebook, on the other hand, currently earns about 10% of that. Advertising accounts for the majority of its revenue, especially in the United States, and Facebook needs to show that it has enough advertising power in order to justify its high price of shares and to show that it has potential for growth and success.

Gokul Rajaram, an engineering that ran one of Google’s successful search engines, was recently hired by Facebook to start their new plan for advertisements: customize ads based on who your friends are and who you interact with most frequently. This is an innovative way to use advertisements and has potential for success due to Facebook’s 900 million users. Without this large user base, this type of advertising may not be as applicable. Although this will be a good way to target specific Facebook users, advertising companies are still skeptical of this technique used alone. Facebook is not drawing new users in the United States where most of its advertising revenue is made making it seem less powerful and influential in the online world.

While targeting advertisements based on a user’s friends may be effective, Facebook still needs to prove to advertising companies that advertising does offer a return on investment. Facebook cannot use a per-view strategy for advertisements because it is impossible to evaluate data about this on the Internet. They could use a per-click analysis of the advertisements, but just because a Facebook user clicks the ad does not mean that they will perform the action of the advertisement. A per-action strategy may be the best way for Facebook to prove that it does have advertising power on the Internet. While this is normally hard for websites to do, Facebook is investing money and engineers into this subject to build Facebook Exchange to perform this task. Facebook Exchange is intended to track the behavior of Facebook users when they are visiting other sites and tailor advertisements to them when they return back to Facebook. This would be a very close idea to the per-action strategy that is the most accurate judge of advertisement success online. If Rajaram and his team of engineers can effectively expand outside Facebook they may be able to bring in much more revenue than they are at this point in time. Only once Facebook accomplishes this feat, without alienating users and steering clear of potential legal hardships, and expands into the growing mobile market will it be able to truly compete with Google, the long time dominator of the market.

 

Article

“Facebook Efforts on Advertising Face a Day of Judgment”

Somini Sengupta

July 22, 2012

http://www.nytimes.com/2012/07/23/technology/facebook-advertising-efforts-face-a-day-of-judgment.html

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