Reporting from San Jose — Facebook is relying on a fast-growing network of independent partners to build an advertising sector that some say may ultimately rival the network of companies that grew up in the last decade around Google's search revolution.
Less than two years ago, there were widespread doubts about Facebook's viability as an advertising business, despite clear evidence of its runaway social popularity. But Facebook in 2011 has emerged as an online ad powerhouse, leading to speculation that the company's IPO could be worth more than $100 billion next year. The social network has done that with fewer than two dozen in-house engineers working on its ad systems, according to people familiar with the company.
Instead, Facebook is counting on independent partners such as Wildfire Interactive Inc. of Redwood City, Calif., and London-based TBG Digital to build out its advertising ecosystem. That network is growing rapidly, both in the number and size of the individual companies, and represents a sector that some say may ultimately rival the search engine optimization (SEO) and search engine marketing industry (SEM) that has developed around Google.
Facebook spawned a multibillion-dollar industry in online social games when it allowed independent developers such as Zynga to run their software applications on the social network in 2007. In a move with a similar philosophy, the social network in recent weeks opened its software kingdom to advertising and marketing data companies that work directly with businesses trying to build their presence on Facebook.
"I'd liken it to the SEM or SEO community that grew up around search," said Grady Burnett, Facebook's vice president of global sales and operations, and a former Google search ads executive. "The idea was, this is a new platform, a new form of advertising, a different set of metrics, and what can we do to really accelerate the growth in that?"
The number of businesses, both large and small, using Facebook to reach consumers appears to be exploding.
Involver, a San Francisco social media marketing company that helps businesses design and operate their page on Facebook, says the number of commercial brands it represents — including singer Alicia Keys and the National Football League — has more than quadrupled this year to more than 550,000.
"Businesses now believe they must be on Facebook, rather than wondering what it is, or whether they should be on there," said Jascha Kaykas-Wolff, senior vice president of marketing at Involver.
The number of brand advertising campaigns on Facebook grew 104% in the second quarter compared with the previous three months, according to TBG Digital, which also has offices in San Francisco and was one of the initial ad data partners that joined the trial to help fine-tune ad campaigns on Facebook.
In online advertising, "there have been two big revolutions," said Simon Mansell, chief executive of TBG. "The first big revolution was Google," he said. "Facebook is the second."
TBG's list of customers includes Coca-Cola Co., Dell Inc., Capital One and Heineken. TBG constantly juggles ad targeting criteria such as age and gender to measure which combinations get the best results.
With big brands increasingly trying to use online social media to reach consumers, ad space on Facebook is growing more valuable: TBG says the "cost per click" of ads placed on the social network grew 74% over the last year in the U.S. and three other of the world's largest media markets. Facebook declined to comment on TBG's estimates.
"I just think there is so much potential there," Mansell said of Facebook advertising. "I think they've got a shot at getting to $30 billion [in] revenue in the next few years."
Whereas Google's keyword search ads help people find what they already know they are looking for, Facebook is trying to grab a chunk of the 90% of TV, print and other off-line ad spending that tries to build consumer demand or awareness for a brand or product.
In some cases, the ad data companies working with Facebook are veterans of search engine marketing that are diversifying into social media, Burnett said. Others, such as TGB and Wildfire, which has grown from seven employees at the start of 2010 to 150 and works with brands including Gatorade and Target, are new companies built around Facebook or other social media companies.
Wildfire's software enables companies to amplify the effect of their Facebook ads by running sweepstakes, discounts or other contests, which are aimed at generating more Facebook fans and attention for the brand.
Victoria Ransom, CEO of Wildfire, said it makes more sense for Facebook to allow outside partners to develop ad products. "It's a fantastic way for Facebook to really encourage innovation," she said.
But Facebook has a delicate privacy line to tread, said Jeremiah Owyang, an analyst at Altimeter Group: Facebook users volunteer personal information such as their favorite musicians, sports teams and restaurants primarily to share with their friends, not to be targeted with ads.
"The social contract between Facebook and the user base is that it's private information between me, my friends and my family," Owyang said.
Swift writes for the San Jose Mercury News/McClatchy.