Facebook’s status used to be measured in the meteoric number of users who flocked to the world’s most popular online hangout.
Now Wall Street is wielding a very different yardstick. It’s focused on how many ads Facebook can sell.
The market value of the social networking giant could top $100 billion in the biggest ever initial public offering for an Internet company. To earn that valuation, Facebook, which made nearly all of its $3.7 billion in revenue last year from advertising, is going to have to turn big brands into paying customers.
Brands are buying more ads on Facebook to reach the site’s 845 million users, who average seven hours a month there. But spending still makes up a tiny fraction of their total ad budgets.
Marketers, who build fan pages and get users to “like” them for free, say that Facebook hasn’t delivered a slam-dunk advertising medium and still lags behind Google, which makes billions from targeted ads that run alongside search results.
Research firm EMarketer Inc. predicts that Facebook’s revenue will grow 64% to $6.1 billion in 2012. It lowered its projections after Facebook’s filing with the U.S. Securities and Exchange Commission revealed a slower than expected growth rate in 2011, particularly in the fourth quarter.
“You have to wonder if Facebook is going to turn on the revenue engines and fulfill the expectations of the investor community, which is putting such a high valuation on the company,” EMarketer analyst Debra Williamson said.
The opportunity is huge. The Web is the second-largest ad market after television. And Facebook has vastly more information than any other company has ever possessed about its users, potentially making it one of the most powerful marketing tools ever invented -- as long as Facebook can make inroads with advertisers.
About a year ago, Facebook launched a major charm offensive on Madison Avenue. Facebook Chief Operating Officer Sheryl Sandberg poached top advertising executive Carolyn Everson from Microsoft Corp., and Everson began courting major advertisers. She helped Facebook set up a committee of executives from major brands and top ad agencies to give feedback on advertising products.
Next week, Facebook is putting on a splashy, invitation-only event at the American Museum of Natural History in New York City headlined by Sandberg; Chris Cox, vice president of product; and David Fischer, vice president of advertising. Facebook is expected to roll out new, more prominent forms of advertising to help brands get noticed on the site. Facebook declined to comment.
Marketers say that Madison Avenue is buzzing about the event at the same decibel level as the unveiling of an Apple device. Marketers are looking for Facebook to roll out ads that are catchier and work on mobile devices. About 425 million users access Facebook on smartphones and tablets.
“There is a romance budding between the marketing and advertising community and Facebook. But it’s uncertain if they are going to get hitched,” said Tim Hanlon, chief executive of consulting firm the Vertere Group.
Jesse Redniss, senior vice president of digital for USA Network, is a fan. Seeking to get people to tune into the sixth season of “Psych,” the cable network created an interactive game on Facebook that let fans take part in the show by helping fake psychic Shawn and his childhood friend Gus catch a #HashTagKiller. Redniss spent a modest sum -- less than six figures -- on Facebook ads to draw in new fans. USA Network’s longest-running series already had more than 2 million fans on Facebook. The social media campaign pulled in 150,000 more.
“Look at the sheer size of Facebook and the targeting abilities they have,” Redniss said. “It’s just too powerful to ignore.”
Greg Kahn, executive vice president and business development director at Optimedia International, says nearly all of his clients are on Facebook, but are still experimenting with how best to reach Facebook users.
“There has been no question for the past year, at least from a marketing perspective, that Facebook is a place they need to be,” Kahn said. “The hurdle Facebook is still facing is getting brands to commit to spending advertising dollars.”
Mark Zuckerberg began accepting ads on Facebook when he started the site in his Harvard dorm room in 2004 to help cover the costs of servers. But the Facebook founder and chief executive has deliberately taken a slow approach to wringing money from the site.
As a privately held company, Facebook could afford to do things its own way, but as a public company, it will be under pressure to find innovative new ways to get users to pay more attention to ads, not just their friends.
“Historically there haven’t been a lot of advertising opportunities on Facebook,” said Michael Hayes, president of digital at advertising firm Initiative. “Fast forward to today and Facebook doesn’t have a choice. They have to get money in the door.”
Though prices for Facebook ads are on the rise, Facebook charges less for most of its ads than other online services.
That could change if Facebook executives can persuade marketers that ads will help them get noticed in the crush of status updates that flow through users’ news feeds.
But will more prominent ads turn off users?
“Facebook stayed true to its own brand, which meant it left a lot of money on the table. But that also means that the advertising Facebook offers fits in very well with the user experience,” Berkowitz said. “Facebook is training its users to be accepting of -- if not receptive to -- advertising.”