How Did Facebook Advertising Get So Big?

The figures are enough to make your head spin: in the first half of 2011 Facebook revealed it had doubled revenue to $1.6 billion - with $500 million of that pure profit - and is on track to exceed $4 billion by the end of the year. Not bad for what began as an online college yearbook.

Facebook's astonishing growth in revenue is closely tied to user growth. The network has accrued a greater number of users than ever before, rising to over 800 million worldwide, extending to diverse demographics and locales, and enabling advertisers to reach and engage consumers with utmost precision and frequency.

The beauty here is that as users add more friends and expand their social circle, they simultaneously post and ‘like’ more content, whether it originates from a friend or an external site. Every single like and share contributes to a rocketing social graph across all demographics, which in turn fuels ad targeting, performance and, eventually, revenue. Completely in tune with this behaviour pattern, Facebook has a burgeoning global sales team focused on brand and agency relationships, and will soon launch an aggressive campaign to recruit more local advertisers.

It stands to reason the widespread usage of Facebook has brought the advertisers flocking. User adoption alone, however, is not the answer to how Facebook got so big. Its progress has been expedited through a combination of widespread take-up, improved advertising products, launch of its social currency, and a rapidly maturing ecosystem.

Its marketplace relies on an auction sales model, and greater competition as well as new and improved ad products like the Sponsored Stories ad unit, zip code targeting, topical targeting, broad targeting and better ad metrics, has increased the overall advertising yield. CPMs are up 60 percent, while CPC revenue is up 30 percent for the first half of 2011 and we expect these to rise further as competition increases in Q4 and into 2012.

Businesses have also been investing in fan pages and applications versus microsites, migrating budgets once dedicated to Yahoo, AOL, and MSN to Facebook. Not only does it deliver against key reach and frequency metrics, but its socially enabled ad units drive high levels of engagement, making Facebook a unique word-of-mouth advertising solution that delivers at scale.

It’s a phenomenal success story and with the potential for further revenue streams such as mobile, display, search and video, putting it in direct competition with Google and other ad-delivery networks, Facebook’s ecosystem has a golden future.

Photo (cc) pshab