A Yahoo source reached us the other day to say this about Facebook:
"There's a story brewing about a next very big business it's building—one that competes with one of Yahoo's flagship ad products and would kill us."
Yahoo is one of the biggest ad sellers on the Web, with $5 billion in annual revenue.
If a big portion of that money moved to Facebook, that'd be big news.
So we found out more.
It turns out what Facebook is doing is pretty simple, but powerful.
It has come up with a way to prove to marketers that there is a type of online advertising besides Google search ads that is worth spending large amounts of money on.
It's the result of a partnership with an upstart Nielsen competitor out of Denver called Datalogix. Facebook has been ramping it up over the past several weeks.
Here is how online brand advertising currently works:
- A marketer puts a picture of their product and some eye-catching, memorable text about it on a bunch of Websites.
- Consumers go to those Websites. Some of them see the ads. Fewer of them click on the ads.
- Some unknown percentage of the users who saw the ads go out and buy the marketer's product after having seen the ad. Nobody really knows how many.
- The marketer counts the clicks and looks at broad sales trends before and after the ads launched to determine if they worked. Sometimes marketers commission surveys to find out if their brand has become more recognizable and memorable.
Here is how Facebook's new product works:
- A marketer puts a picture of their product and some eye-catching, memorable text about it on Facebook (or, in the near future, sites that are partnering with Facebook).
- Consumers go to those Facebook pages. Some see the ads. Some click on them.
- Some percentage of the users who saw the ads go out and buy the marketer's product after having seen the ad.
- As the marketer's product is sold, the retailer takes note of the shopper's email address, home address and phone number (which are already on file through loyalty programs and the like).
- Facebook, which has the email addresses, home addresses, and phone numbers of about billion people, checks its logs to see if its user with that information saw an ad from the marketer pushing that product. (NOTE: Facebook, retailers, and Datalogix do this through a series of double-blind procedures using "hashed identifiers" that entirely protect user anonymity. Hashes are bits of text that uniquely identify a piece of data, such as contact info, but are designed to protect against reverse engineering which would reveal that data.)
- Facebook delivers an anonymized report to the marketer, telling them what percentage of people who saw their ad on Facebook went out and bought the advertised product.
- Instead of looking at unreliable clicks, surveys, and sales trends, marketers can look at that report and do a simple return-on-investment calculation based on how many people saw the ad and how many of those people went out and bought the product advertised.
Our source says this new Facebook product "closes the loop" on brand advertising in a way that no site besides Facebook is able.
This source gave three reasons Facebook can do this and no one else, including Yahoo, can: Scale, scale, and scale.
- No one has more brand advertisers already on board than Facebook. (Yahoo and some others may have as many brands).
- No one has as many users looking at brand ads as Facebook does.
- No one has all of the email addresses of the users looking at its Facebook ads the way Facebook does.
This source said that Yahoo has a similar product it offers advertisers, and that it generates revenues around $500 million. This source estimates that Facebook could do multiples of that.
Facebook knows it is onto something huge here. The best evidence?
Our source says the rumor is that Facebook has, as a part of its massive deal with Datalogix, secured the right to be notified should any suitors come by, looking to acquire.
Facebook formally launched a similar product along these lines for online retailers and direct marketers today.
Facebook declined to comment on this story.
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