By Geoffrey A. Fowler and Emily Steel
November 2nd, 2011
Web companies often upend industries. But they can labor for years to fully make money on their revolutions.
Take Google Inc. When the Internet titan came onto the scene in the 1990s, the company first focused on building technologies for searching the Web before considering its advertising prospects, recalls Rishad Tobaccowala, chief strategy and innovation officer at Vivaki, the digital advertising company owned by Publicis Groupe SA.
It wasn’t until a competitor, GoTo.com, created a pay-for-placement search product in 1998 that Google got serious, he says. The way that service worked, a company would make a bid to appear at the top of a search results page then pay if a consumer clicked. Google launched a similar advertising product in 2000. The key difference was that the system took into account the relevance of the ad to decide its placement on the search engine results page, not just the amount that the advertiser paid.
But the company’s early successes didn’t come from major corporations, but rather the so-called “long tail” – smaller, often local businesses. Gradually, search advertising gradually grew in importance across a wide spectrum of marketers, especially those in the automobile, tech and finance industries where online research became an important factor in people’s decision to buy a product or services, Mr. Tobaccowala says.
Google gradually expanded to selling a wide range of ad formats, including search to display to mobile. Today, Google leads the Internet advertising business. The company is expected to capture 40.8% of the U.S. Internet ad market this year, or $12.8 billion, according to research firm eMarketer Inc.
Similarly, Facebook’s earliest success with paid advertisers has come from that “long tail” with the businesses largely using the site’s demographic targeting abilities to reach a niche audience.
According to comScore Inc., almost 62% of the ads shown on Facebook in the July through September quarter came from advertisers that are not among the top 1000 digital advertisers in the U.S.; on Yahoo Inc., just 23% come from such small advertisers. These sorts of Facebook advertisers range from nail salons marketing to people who live a particular town, to recruiters targeting employees at a specific company.
“Facebook has the great opportunity to change the way that people think about advertising. Now, if only they can make it happen,” says Sean Corcoran, an analyst with Forrester Research Inc.
Lately, Facebook has been amping up its pitch to Madison Avenue by touting the capabilities of ads that incorporate information about users’ friends, and even their names and photos. It has invented out a new genre of paid advertising formats, dubbed “sponsored stories,” that let marketers spend money to republish user comments involving companies as ads.
The idea is that customers can be turned into promoters. “The most effective way to influence someone is through word of mouth marketing,” says David Fischer, who runs Facebook’s ad department. Stimulating and measuring friend referral has long been the Holy Grail for marketers – but it has become tantalizingly possible at scale on a social network like Facebook.
“On Facebook, for the first time, you have the ability for marketers and brands to connect to people — and ultimately to tell their stories through people,” says Mr. Fischer.
Sponsored story ads are exact copies of what a users already post to Facebook – the difference is that the sponsored ones get plucked out and posted again next to other ads.
Facebook tells advertisers that sponsoring a post increases the chance friends will notice it, since new postings in the news feed push others down and off the page.
Only 20% of free messages posted by companies to users ever actually get seen on the site, Facebook says. Buying sponsored stories is a way to dramatically increase the odds that a piece of content will get seen. Moreover, Facebook says that some of the early users of sponsored stories have found that users are more than twice as likely to click on sponsored stories than typical Facebook ads.
To be sure, Facebook isn’t counting its entire future on advertising. It is also nurturing a digital payments business called Credits, in which it takes a 30% cut on consumer purchases of digital goods in social games, such as those made by Zynga Inc.
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