• by Mark Walsh  @markfwal, July 12, 2011

Advertising has never been part of Facebook's DNA - a point underscored in The Social Network, last year's hit movie about the company's origins. In the film, cofounder Eduardo Saverin constantly urges fellow founder Mark Zuckerberg to focus on monetizing the fledgling site using ads. He doesn't succeed.   In more recent years, Facebook has been ridiculed on one hand for relying heavily on cheesy banner ads selling things like hair transplants and weight-loss products, and on the other hand for more ambitious efforts like Beacon - which was scrapped after triggering a privacy backlash for broadcasting users' online purchases. Nevertheless, Facebook has emerged as a display-ad heavyweight in its own right. In February, eMarketer raised eyebrows by predicting that this year Facebook would end Yahoo's reign as the Web's display-ad king by taking in a projected $2.2 billion from graphical ads in the U.S. and $4 billion in overall revenue.

Facebook has already taken the lead in display impressions. In the first quarter, it accounted for nearly one-third of the 1.1 trillion total U.S. impressions, followed by Yahoo at 10 percent.

Still, the social networking juggernaut isn't satisfied with simply racking up impressions from its more than 600 million users worldwide. Facebook now aims to grab a bigger slice of brand-advertising budgets by developing an array of innovative ad options - and by blunting criticism that the site's small ad boxes afford little room for creative executions. It also wants to maintain its core principle of making advertising conform to Facebook's fluid social dynamic rather than the other way around - a conundrum in trying to attract more brand dollars.

Facebook's self-serve ad system has been its ad revenue engine so far. Targeted ads that appear on the right side of pages through the system (typically home or profile pages) account for an estimated 60 percent of Facebook ad sales, according to eMarketer. Geared to marketers with monthly budgets under $30,000, the self-serve platform tends to draw a high proportion of placements from small- and medium-sized business - and lots of direct response ads.

These Facebook ads often incorporate a social element, letting users see what actions their friends have taken in connection with an advertiser or ad, such as "liking" a brand page or responding to an event-related ad. Earlier this year, Facebook took that word-of-mouth concept a step further with the rollout of Sponsored Stories, a new premium format that essentially turns status updates themselves into ads. Actions such as "liking" a brand, "checking in" at a venue, or sharing an app that appears in the user's news feed are converted into ads for the companies or products mentioned. And there's no way for people to opt out of seeing or being featured in the ads. 

Coca-Cola, Starbucks and Levi's are among initial advertisers using Sponsored Stories. Speaking at an industry event in May, Carolyn Everson, vice president of global sales at Facebook, said the ads have a 68 percent recall, with people twice as likely to remember a brand and four times as likely to take action. She also suggested the new ad type is just scratching the surface, saying Facebook's advertising is only "one percent where we need it to be."

To build stronger ties with brands and agencies, Facebook has increasingly brought on experienced hands like Everson, who was head of global advertising at Microsoft before joining the company in February. Last year, Facebook lured Jennifer Kattula from Microsoft's Online Services Divison to lead agency marketing. More recently, it tapped Mark D'Arcy, former head of Time Warner's Global Media Group, as director of global creative solutions.

At the time of his hiring in late March, D'Arcy told The Wall Street Journal: "There is a great need for the creative community... to learn how to leverage the incredible power of Facebook to improve the way brands tell stories."

Translation? Facebook wants to persuade marketers to embrace its goal of blending advertising and content seamlessly to boost engagement, rather than relying on tactics like screen takeovers and expandable ads to grab users' attention.

That points to a broader split within the industry about how to lure more brand dollars from TV to the Web. Trade groups like the Interactive Advertising Bureau and the Online Publishers Association have pushed the adoption of oversized new ad formats to provide a bigger canvas for ad creative than traditional banners can furnish. It means delivering something closer to magazine ads or tv commercials, albeit interactive versions. 

Yet that's not what social networking services like Facebook or Twitter have in mind. "Engagement not intrusion" has long been Facebook's mantra when it comes to advertising, as it eschews traditional notions of interruptive messaging. Instead, Facebook wants to mine the myriad interactions across the social graph to turbocharge word-of-mouth, the Holy Grail of marketing.

Advertisers are all for generating as many "likes" as possible on Facebook. But they also want new ways to inject creativity into brand messages beyond a box with text and a thumbnail image. "Right now, it's not a very fun place for creatives to push work because the canvas is very small, but I think that's why they need Mark [D'Arcy]," said Matt O'Rourke, chief creative officer at MDC Partners' Crispin Porter, in an interview in April. 

Partly to deflect such criticism, in March Facebook launched Facebook Studio, a site showcasing top creative campaigns that have run on the social network. Many of the examples, involving companies from Nike to Procter & Gamble to Sony Ericsson, feature campaigns that revolve around Facebook brand pages and specially created applications.

To foster closer relations with Madison Avenue, Facebook also ran a contest challenging agencies themselves to design a new ad unit. In April, the company announced Publicis agency Leo Burnett Chicago as the winner. The winning entry will let users answer questions posed by marketers, with a user's responses then showing up in his or her news feed. This functionality is very much in line with existing ads that allow people to answer poll questions, watch a video or use an application. 

In connection with Facebook Studio, the company has also launched a series of live events to complement the site. The second Facebook Studio Live meeting, held in May, drew more than 200 agency creatives, account directors and other executives to hear Facebook presentations and participate in a marketing "hackathon." "Facebook is really redoubling its efforts to go after those big contracts from major brands," says Debra Aho Williamson, who follows the company as an eMarketer analyst. "That makes sense. These are companies that spend millions of dollars a year online, not to mention billions in total ad spending, and Facebook wants more of it."

Beyond touting ad creative potential, Facebook is also trying to bolster its offerings on the analytics side. Brands overall may collect 50 million "likes" a day on the social network, but what do all those affirmations add up to? To that end, two years ago Facebook struck a partnership with Nielsen to help make the connection between engagement metrics on Facebook and traditional brand measures like awareness, recall and purchase intent.

Besides providing brand metrics to help Facebook prove the effectiveness of Sponsored Stories and other ad units, Nielsen is also planning to roll out a "GRP-like" rating for Facebook campaigns to help boost brand spending on the platform. The media-measurement firm first discussed testing the Internet equivalent of Gross Ratings Points - the TV formula tracking the reach and frequency of an ad - last September. 

At the Studio Live event, Facebook executives said they're already seeing promising results with a few brands from the online GRP and talked about introducing it more widely soon, according to Matthew Chesler, a Deutsche Bank analyst who follows Nielsen. "It is clear that Nielsen is already a key strategic partner to Facebook and is now building out a metric that may become the primary measurement currency for Facebook ad purchasing," he wrote in a May research note. The concept of an online GRP, however, has been kicked around for years, so it's best to view a breakthrough in that regard with a healthy dose of skepticism. Whether Facebook's wider push to woo the ad community will pay off with more and bigger brand budgets remains to be seen as well.

Shiv Singh, head of digital for PepsiCo Beverages, says the company appreciates Facebook because "it's an incredibly powerful engagement platform for us." The social network has played a key role in the Pepsi Refresh Project, the company's crowd-sourced community donations program. He also welcomes Facebook's more pronounced outreach to marketers and its efforts to expand creative options. But that won't, in itself, necessarily translate into Pepsi spending more with Facebook. "We don't play favorites," says Singh. "If [Facebook] makes a compelling case and [has] an ad format that works and gives us measurable results, yes, we'll do more things."