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Facebook's New Ad Strategy Likely to Improve Revenue, Alienate Users

Carol Kopp

Facebook has a new advertising strategy that has enormous potential to enhance its revenue model, and might have just as much potential to alienate its users.

The new strategy being rolled out this week allows advertisers to buy ads targeted to the people who "like" their marketing sites, and to the Facebook friends of those people. Time magazine does the math, and notes that this can turn a company with 40,000 "likes" on its marketing site into an ad buyer with a potential reach of 12 million pairs of eyeballs, all of them belonging to people who have demonstrated some connection to a satisfied customer.

This is pretty heady stuff for advertisers, assuming that most people have a circle of friends who share something in common with them—they're mostly young suburban moms, or Latino college students, or people who live in Atlanta. Few of us are that exclusive, of course, but it adds up to a promising "promoted word of mouth" campaign.

Still, it gets weirder, in two ways:

-The messages don't necessarily show up in the ad space. They will show up along with the comments in Facebook's misnamed "news feed," along with the usual posts from real friends and friends of friends. Separation of editorial and paid advertising apparently is for geezers or Google (GOOG), in Facebook's view. (Also read Google and Facebook Exposed At Last!)

-Facebook also may target users' friends with sponsored posts that incorporate comments that the user posted on the advertiser's site. For instance, if a user writes "Wowie, your detergent wiped that ketchup stain right off my kid's jeans," the users' friends might subsequently see that text in a detergent ad. Of course, the customer wasn't paid for pitching the product. She didn't know it would be used that way, but that's probably in the fine print somewhere.

Facebook reckons that the above commercials are 40% more engaging, and 80% more memorable, than other ads.

While we're throwing around dubious statistics, here's another one: This ad strategy is a zillion times more likely to lead to unintentional comedy and loyal customer creep-out syndrome. It also will inevitably lead to Web-based versions of fun parlor games, like one in which friends compete to trick advertisers into paying for 12 million subtly negative robo-ad placements.

We may already have the historic first example of this kind of advertising gone wrong: The Los Angeles Times tells the tale of an Iowa City writer who became the accidental pitchman for an Amazon (AMZN)-sponsored advertisement for a 55-gallon drum of a personal lubricant called Passion Natural. The poor man posted a humorous remark about the product, and now all his Facebook friends (i.e., co-workers, relatives, clients) have viewed his apparent endorsement of it.

Meanwhile, it appears that Facebook users are becoming more concerned about lowering their online profiles, just as Facebook is getting better at exploiting them.

A study by researchers at the Polytechnic Institute of New York University suggests that there has been a dramatic increase in use of privacy controls by Facebook users over the past 15 months. The researchers crawled the public profiles of 1.4 million Facebook users to determine how many chose to limit access to their personal profiles.

Another new study, from Pew Research, also indicates that more users of social network sites are actively managing their online profiles and lists of contacts. That is, they're more proactive about deleting contacts, removing their names from photos, and deleting comments on their pages.

Web Weekly In Brief:

About Yelp's Debut

The previews are mixed as Yelp launches its initial public offering (IPO) on Friday, March 2, with the NYSE symbol YELP. The customer-reviews site expects to raise about $100 million by selling 7.1 million shares at a range of $12 to $14.

The Wall Street Journal concludes that the stock should pop on its debut, but its ability to hold onto the gains is "debatable."

That trajectory would put Yelp in the same company as earlier IPOs by two Web companies with a similar profile—that is, they are social media sites designed to appeal to local consumers, and they're not profitable yet. Coupon site Groupon (GRPN) and customer reviews site Angie's List (ANGI) both rose sharply on their debut. Groupon is now trading about 30% below its IPO price. Angie's List is about 19% above its IPO price but lower than its first-day close.

Yelp revenues jumped an impressive 75% in 2011, to $83.3 million. But it has yet to turn a profit, with net losses last year of about $16.7 million. Yelp boasts a deep database of 25 million reviews of local businesses, and a user base of 66 million unique users a month. Its revenues come from advertising.

MSN Money echoes a common concern among investors: reviews sites "are a dime a dozen." Moreover, one of them is Google, which has removed some of its links to Yelp content in favor of its own product reviews.

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