Will Facebook Eat Advertising?

Netscape founder Marc Andreessen says that software is eating the world -- and he’s right. All of the necessary ingredients for this revolution are now in place: Programming languages like Ruby make creating software easier and faster than ever before, cloud-based hosting allows software to be served at a global scale, and over two billion people now have broadband Internet access.

As a result, every industry is in the process of being revolutionized by software, including advertising. With its initial public offering looming, one pertinent question is if Facebook, with 845 million active and engaged monthly users, will be the software that eats brand advertising. This is the kind of question that our industry has truly never faced before.

On the surface, it would seem absurd that a company that has built an advertising business on the back of a glorified classified ad should become the dominant software platform for the industry. Facebook’s talented global ad sales team seems almost redundant as it stands next to a machine that sucks in brand advertiser dollars with the force of an F5 tornado. Similar to Google’s pay-per-click search listings, Facebook is something that must be bought -- not something that has to be sold. Marketers have almost no choice in the matter.



This automated approach to selling ads has been incredibly successful for Facebook. The company will generate a billion dollars this quarter in ad revenue. According to industry vet Rishad Tobaccowala, at $100 billion Facebook is valued at three times more than the top four agency holding companies combined. Remarkably, Facebook is driving this ad revenue and valuation with 100 times fewer employees than the agencies.

Facebook is also impacting major online publishers. Some ad sales pros complain that after Facebook and Google have their way with advertising budgets, they end up with just the crumbs, fighting for what’s left.

Perhaps the most troubling part if you work at a company that is not Facebook (or one of its symbiants like Zynga or Buddy Media) is that the world’s largest social network is just getting warmed up when it comes to advertising. It’s said that the company will soon be launching mobile ads. Facebook will also offer its own proprietary, cross-platform, rich-media ads.

Since Facebook doesn’t provide advertisers with any third-party ad tracking, the company doesn’t have much use for the existing infrastructure of ad servers and rich-media companies. Facebook hasn’t run an IAB-approved ad in years. When you throw off a billion dollars of profit a year, you can pretty much buy or build anything you want. When you have a billion users, industry standards become irrelevant.

As a result, Facebook is the first digital media company in a position to own the brand advertising software platform. We have never seen anything quite like this. The three major U.S. television broadcast networks had one another to compete against during the last century. AOL, CompuServe and Prodigy battled for the future of online services in the 1990’s. Portals Yahoo, Microsoft, and AOL duked it out during the last decade for dominance. But at this moment no other software company has the kind of scale, engagement and power that Facebook has achieved.

In its IPO filing, Facebook claimed that Google is a competitive threat -- but this just highlights how truly dominant Facebook has become. Google is part of the Web’s last era, when direct-response advertising ruled. Investors know this. Over the last five years Google’s stock has barely budged, up just 17%.

While new startups like Pinterest and Path are generating consumer interest, it will be some time -- if ever -- before they approach the scale and power of Facebook. Perhaps the only real threat to Facebook right now is Twitter. In some circles it has become more relevant than Facebook, especially when it comes to professional networking and content. But it remains to be seen if the less intuitive and more limited Twitter ever attracts the broad swath of consumers that Facebook has amassed.

After years of debate and consternation, the industry seems to understand that software is going to eat advertising.

The only question now is, who will build the software that wins?

2 comments about "Will Facebook Eat Advertising?".
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  1. Jesus Grana from Independent, February 6, 2012 at 12:11 p.m.

    Very insightful - Thanks

  2. Jim Courtright from Big Thinking By The Hour, February 6, 2012 at 1:53 p.m.

    Yes, Facebook will get a huge share of ad revenue, to the detriment of traditional media. But Google will get more. Because Google has one thing Facebook does not: A proven video distribution Leviathan called YouTube. All it takes is some savvy software and both companies will be able to micro-target people, one on one, with ad messages. That will make each message worth more than a broadcast message. Even bigger, look for Google to find ways to do their one-to-one ad messaging over traditional cable-based broadcast content through set-top boxes. Google will get the biggest piece of the ad revenue pie, IMHO.

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