If Facebook Built An Ad Network, How Much Money Could It Make?

Google revenue makeup

Photo: Google filings

Today on Geekwire, Estately CEO Galen Ward argues that he’d bet his entire retirement fund on Facebook.He assumes that Facebook will build an ad network, and points out that Google AdSense, which has revenues of $10 billion per year (see Network revenue, chart 1).

He argues that as soon as Facebook’s network offers slightly better ROI than AdSense, advertisers will switch.

There are a number of flaws with this argument. Most notably, as we pointed out in our special report on Facebook’s growth potential, ad networks are a highly competitive and mostly commodity business (there are more ad networks than Google AdSense), and Facebook has plenty of work to do to increase ad sales on its own sites, where margins are higher.

But the main flaw with this argument is that Google reports GROSS revenue for its network sites.

That’s revenue before it pays its ad partners their required cut.

A better measure is NET revenue, which is quite a bit smaller — about $3.1 billion according to our calculations, based on statements in Google’s earnings reports. (see chart 2):

Google Networks revenue and payouts

Photo: Google filings

So even if Facebook builds an ad network and takes every single AdSense customer, it won’t really be making $10 billion a year in any meaningful sense.

Google also sells ads on its own sites — mostly search — and made $26 billion in sales last year from those ads. But as Henry Blodget argued late last year, Google’s search ads are a uniquely good business, because Google places them in front of consumers exactly as they’re planning to buy something.

Facebook mainly sells display ads, which are much less effective.

There’s also another Facebook business which everybody seems to be ignoring: Payments. As we argued yesterday, this could be a multibillion dollar business by the end of 2013, if Facebook expands the types of goods it offers.

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