Facebook Must Spend to Woo Marketers

Site Would Be Wise to Use Recent Cash Infusion to Boost Its Ad Infrastructure

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NEW YORK (AdAge.com) -- Weeks of intense negotiations between the titans of Silicon Valley ended last week with Microsoft dropping $240 million into Facebook for a 1.6% stake. The injection of cash -- and the mammoth $15 billion valuation -- begs the question: Just what will Facebook do with all that money?

Facebook Chief Revenue Officer Owen Van Natta

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Facebook's Map Might Lead Advertisers Astray

If it's wise, it'll invest more resources into attracting advertisers.

Ad targeting on social networks, thanks to the vast amounts of data users volunteer on their profiles, appears promising, in part because of the potential for sophisticated targeting schemes for direct marketers, said David Card, analyst at Jupiter Research.

"But the people who are most excited about marketing on social media are brand marketers and they need coddling," he said. "They need to increase their bandwidth to handle the advertisers."

Where the money's going
On a conference call announcing the deal, Facebook Chief Revenue Officer Owen Van Natta stressed the funds would go toward hiring "a lot of developers" and buying additional infrastructure to handle the site's traffic.

"We've talked a bit publicly about how we're expanding our employee base dramatically; we're hiring a lot of developers at Facebook. We expect to end the year over 700 employees next year," he said. He also noted Facebook's explosive growth and the increasing importance of international expansion.

"Obviously there's a lot of technical operations that come along with that. We want to be able to provide people with an incredibly rich experience and very fast response times, and [we need] the technical infrastructure."

He might want to add advertising muscle to that list. While Facebook is an intriguing media platform for many marketers, few know exactly how to use it, making it more time-consuming and involved than many other media buys. The company is on the brink of making a major push toward doing that, hosting an advertiser-focused event Nov. 6 in New York.

'Big plans'
Facebook also recently trademarked the term "SocialAds," and, according to ad-industry executives familiar with the company, it is also interested in targeting its users with advertising off Facebook via a network play, a move Facebook has not confirmed.

"It's pretty obvious they've got big plans in advertising," said Debbie Aho Williamson, senior analyst at eMarketer. "They may have intentions to become the Google of social-network advertising." EMarketer predicts worldwide ad spending on social networks will hit $1.235 billion in 2007 and $3.63 billion by 2010. In the U.S., those numbers are $900 million for this year and $2.515 billion for 2010.
The $15 billion social network
Facebook's valuation (based on current round of funding) of $15 billion is:
  • 100 times its 2007 revenue

  • Almost 10 times more than the $1.67 billion Google made in its IPO

  • More than three times Interpublic's market cap

As part of the deal's terms, Microsoft will be the exclusive third-party ad-platform provider for Facebook. It also will begin to represent some Facebook inventory internationally. Microsoft already has a deal to sell third-party IAB-standard display advertising on Facebook in the U.S. Earlier this year the terms of this deal were extended to 2011. Facebook will continue to sell the newsfeed ads and sponsored groups, along with the new SocialAds it will introduce next month. The deal does not include web search.

Microsoft and Google were both said to be in the running to finance this latest round of funding. At stake is an entry into arguably the web's hottest property and a potential advertising goldmine should Facebook be able to mine the vast amounts of data its users upload onto their profiles and use that information to target advertising.

Kevin Johnson, president-platforms and services at Microsoft, said the site's value to advertisers will grow "as Facebook innovates around new ad types unique to the social experience."

Astronomical valuation
Facebook is supposedly on track for 2007 revenue and profits of $150 million and $30 million, respectively. Using those figures, the round in which Microsoft is participating values the site at 100 times 2007 sales and 500 times 2007 earnings.

Addressing the massive $15 billion valuation of Facebook, Mr. Johnson said it "was not outside the realm of possibility" for Facebook to grow to 200 million or 300 million users. "You can combine that with monetization opportunities and combine that with average revenue per user ... and very quickly get to these levels of valuations," he said.

"We see continued improvement and great progress with the overall monetization of the Facebook inventory," Mr. Van Natta said. Incidentally, one of the most prescient investments into Facebook now appears to be Interpublic Group of Cos.' summer 2006 commitment to spend $10 million in media dollars on the site in exchange for a 0.5% stake. That investment's value today? About $75 million, if all the valuations pan out -- although that remains a big if.
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