Untangling the Implications of Facebook's New Ad Exchange

Restrictions on the Exchange Should Make It Complementary

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Facebook's recently announced real-time bidding exchange raised a number of questions, even though at Cannes, Facebook's Carolyn Everson referred to the FBX as not even a 1.0 alpha, but at best an extremely limited and experimental .1 alpha program. Whatever it's called, the news caught many industry insiders off-guard, creating a lot of confusion in the market about the Facebook advertising ecosystem, especially for agencies, brands and its longstanding Ad API (Application Programming Interface) partners.

For brands and agencies, the announcement created a media collision around who "owns" Facebook: Is it the Demand-Side Platforms (DSPs), or the Ad API partners? Some agencies even questioned the need to have an Ad API partner. It also sparked debate about which buying groups should "own" Facebook – display teams, trading desks, search buyers, or newly created social teams? Fundamentally, everyone wonders how this change should affect marketing and advertising strategies on Facebook, and how agencies and brands can produce the best solutions for their clients.

We can begin to answer these questions based on what we know about how the new offering differs from Facebook's current model. It has become clear that the Facebook exchange is not competitive with, but complementary to, existing advertising options.

The Facebook Exchange test program has several important restrictions in place. It will not allow advertisers to combine first-party data or social graph data in order to target ads. FBX will use only cookie data from sites visited on the user's browsers, and will allow additional third-party cookie data from DSPs to be combined to enhance targeting and performance. We expect these ad units to appeal to a broad base of performance-based and brand advertisers.

Given these rules, FBX will work best with direct-response remarketing ads. For example, if consumers visit a site like AutoTrader.com, they'll get tagged with cookies and labeled "auto intenders." Auto manufacturers like GM or Ford can then use a DSP to bid on that ad impression on Facebook.

FBX will not replace the role that existing Ad API partners play in helping brands and agencies target Facebook audiences. For one thing, Ad API partners can still help brands and agencies target based on first-party data, while the FBX is restricted to cookie data — a major limitation. For another, the Ads API program will maintain its focus on brand engagement, while FBX is all about direct response. Finally, API partners retain the tools currently at their disposal, including social objects and the ability to leverage the social graph for ad targeting, even as they gain early access to new advertising programs such as mobile advertising.

The two strategies – FBX and Ad API offerings – are ultimately complementary. While advertisers won't be able to overlay API data on Exchange data, they can use the two components as part of a larger Facebook advertising initiative. Running FBX and API campaigns simultaneously should help marketers close the loop on performance metrics. Ads purchased through the API will continue to focus on brand and engagement metrics, but marketers will now be able to clearly track off-Facebook conversions with FBX ads.

Given the size of Facebook's audience and the wealth of third-party data available, FBX will help brands move customers through the sales funnel on Facebook, driving them from initial awareness to engagement and then to a purchase, seamlessly. FBX is also complementary to the trading desks that performance marketers currently employ for DR focused campaigns.

It's a meaningful move for the network itself as well, because FBX diversifies and expands revenue channels and the value of Facebook inventory.

The goal of the FBX launch is to enhance revenue opportunities by delivering additional relevant advertising and messaging without disrupting the user experience, a challenge similar to the one faced by Google after its IPO. Facebook's newly launched mobile offering clearly delivers on this promise, as evidenced by click-through rates between 1%-3% — significantly higher than its desktop advertising offering.

This is just the beginning for Facebook. It's exciting to see the pace of innovation and evolution of its business as it matures.

Dave Williams is the CEO of Blinq Media.
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