August 4, 2010
Facebook Inc.'s biggest advertisers have boosted spending by at least 10-fold in the past year as the social network crossed the half-billion user mark, becoming more alluring to marketers that want to reach a broad online audience.
Some advertisers have increased spending by as much as 20-fold or more, Facebook Chief Operating Officer Sheryl Sandberg said in an interview. The site's ad prices have held steady even as user growth fueled a surge in inventory, or pages that can carry ads, she said.
"Two years ago the big brands were experimenting with us," said Sandberg, 40, declining to identify which customers were spending more. "They started buying with us a year ago. Now, they're going big." As a closely held company, Facebook doesn't disclose revenue figures.
Facebook is courting advertisers and ramping up the pace of acquisitions to wring profit from its more than 500 million users, who don't pay to use the site. The owner of the world's largest social network may put off an initial public offering until 2012 to give Chief Executive Officer Mark Zuckerberg more time to add sales and lure users, people familiar with the matter said last week.
The company plans to make more purchases to recruit leaders and build features to keep users glued to its pages -- and ads running on them -- longer. While Facebook has mainly focused on startups with smaller staffs, it may pursue bigger transactions, said Vaughan Smith, director of corporate development.
"As we get bigger and our platform gets more stable, I fully expect that we will be doing more significant acquisitions," Smith, 43, said in an interview. "This is working for us, and it's working for the people that we're acquiring."
Founded in 2004 by Zuckerberg in a Harvard University dormitory room, Facebook lets users share photos, video, short messages and other information with groups of friends. After surpassing News Corp.'s MySpace as the world's biggest social network in 2008, Facebook nudged aside AOL Inc. to become the fourth-most visited site in the U.S. last year, according to ComScore Inc. Only Google Inc., Yahoo! Inc. and Microsoft Corp. are bigger.
Facebook's sales may rise to at least $1.4 billion in 2010 from $700 million to $800 million last year, two people familiar with the matter said last week.
Facebook, based in Palo Alto, California, gets much if not most of its revenue from advertising. Its customers include Coca-Cola Co., JPMorgan Chase & Co. and Adidas AG.
"You can't ignore the reach that's there, but it's also the true engagement that we have," said Michael Donnelly, Coca- Cola's director of global interactive marketing.
Facebook's future growth will hinge partly on whether it can overcome privacy concerns and stave off a threat by rivals including Twitter Inc. Consumer groups and lawmakers have alleged that Facebook doesn't do enough to protect the personal information on profiles.
"Facebook's value is being able to preserve that user base," said Michael Gartenberg, a partner at researcher Altimeter Group in San Mateo, California. "Those 500 million users -- advertisers not only want to make sure that those people aren't churning and that they're actually using their accounts, but that there's growth here as well."
Advertisers 'Dig In'
Another hurdle lies in a lawsuit that raises questions over who owns Facebook. Paul Ceglia, of New York, claims that he owns an 84 percent stake, based on an April 2003 contract. Facebook says the lawsuit is "frivolous, if not outright fraudulent."
To make marketing messages more appealing to marketers and less intrusive to users, Facebook has incorporated social elements. Below an ad, users can see which of their friends may be fans of the advertiser, for example.
"Some clients have actually been pretty active on Facebook for a while, but we're finding a number of clients that are starting to dig in a little bit more," said Joe Mele, a managing director at Publicis Groupe SA's Razorfish agency. "We're seeing increased interest."
With each new user, Facebook gets more pages on which to place ads, resulting in an inventory surge. Yet prices for ads based on the number of times they are viewed have held steady in the past year, Sandberg said. The prices of the social ads may rise as Facebook brings more "value" to companies, she said.
"A movie studio last year that did three movies with us -- this year, if they're releasing 12 movies, they'll do 10 of them with us," Sandberg said. "A company that did one product launch with us -- this year they're going to do half of their product launches."
Also buoying ad prices, about half of Facebook users return to the site daily, the company says. That makes the users valuable to advertisers that want messages viewed multiple times.
Much of Facebook's ad growth comes from so-called display ads, graphic messages that usually appear as boxes on Web pages, rather than the search-related ads that are Google's mainstay. Facebook displaced Yahoo as the top U.S. site for display ads, with 16 percent share in the first quarter, up from 11 percent in the fourth quarter, according to ComScore in Reston, Virginia.
Spending on display advertising is expected to rise 13 percent to $8.56 billion in the U.S. this year, after a 4.5 percent gain in 2009, according to EMarketer Inc.
To chase that growth, Facebook is relying on dealmaking. It has made five acquisitions so far this year after one apiece in 2009 and 2007, Smith said.
The company buys small startups -- typically with a dozen or fewer employees -- to gain entrepreneurs who can become future leaders, Smith said. Chief Technology Officer Bret Taylor came from FriendFeed, acquired last year.
Facebook will keep up the acquisition pace and may pursue larger, more complex transactions, Smith said. He plans to hire another corporate development executive, adding to the one person helping him clinch deals now.
The company doubled the number of salespeople last year from 2008. It now has more than 1,400 employees.
Among potential targets are companies that focus on virtual currencies and mobile social networking, Smith said. The company also is looking for acquisitions that may bolster its advertising effort, he said.
"We're doing advertising, especially brand advertising, in a different way than has been done before," he said.
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