The Facebook IPO: A Look Inside Its $1 Billion Ad Business

laptop girlFacebook ads: Your eyeballs are worth a lot of money.

Photo: Harald Groven / Flickr, CC

Facebook’s stock began trading publicly today, May 18, 2012.Before you decide whether to buy FB, it’s worth looking at the social network’s finances and client strategy.

About 82 per cent of Facebook’s revenues—running at $1 billion per quarter and growing—come from advertising.

  • But did you know that Facebook could, in theory, eventually generate $10 billion a year in ad sales?
  • Or that Twitter actually commands higher ad prices?

Here’s a guide to everything that is currently known about Facebook’s ad business.

Here's how Facebook sees its role in history.

Whenever a new mass medium is invented, marketers try to force their old habits into the new platform. That doesn't work, and it's only when marketers learn how the new medium really works that they become successful using it for advertising, according to this slideshow by Paul Adams, Facebook's global brand experience manager.

Facebook has the potential to cause tectonic shifts in the advertising business. It already has at P&G.

Procter & Gamble, the world's biggest advertiser (it spends $10 billion a year on media), has said it will scale back its traditional ad budget and lay off marketing staff because it can get more efficiencies out of exposure in social media such as Facebook.

Growth in Facebook's ad business is slowing, although it is still likely to grow toward $1 billion per quarter.

Facebook's total ad revenue could theoretically top out at $10 billion annually.

The estimate, by TBG Digital, assumes that Facebook completely sells out its entire inventory of ad space--which it never has.

Ad prices at Facebook are also slowing down as the company adds more inventory.

Facebook is becoming bloated with ad salespeople as its business slows.

In one major way, Facebook is quite old-fashioned: Its ad business is maturing and growth is slowing. It needs more sales people than ever to generate its revenue. Facebook increased its salesforce 34 per cent in 2012.

The U.S. market, Facebook's largest, is particularly vulnerable to slowing ad revenue growth.

Facebook had a great Q1 2012, with a 41 per cent increase in ad rates (the cost-per-thousand impressions that advertisers pay), according to TBG Digital, a major seller and manager of Facebook advertising campaigns.

But click-through-rates in the U.S. softened--not a good sign.

Surprisingly, given its huge reach, Twitter commands higher ad prices than Facebook does.

Twitter's CPM's can reach more than $3.50; Facebook's are often less than 50 cents, the data show. The difference seems to be that users shy away from display advertising because it's so obvious.

When Facebook starts to get significant revenues from mobile advertising it will likely pull ad prices down even further.

That was Google's experience. These charts show how Google's revenues slowed as mobile advertising took off, and click prices declined on greater aggregate volume as a result. Greater supply lowered prices across the board, it appears.

Facebook claimed in its IPO roadshow that advertisers can get $3 in incremental sales for every $1 spent on ads.

That, at least, was the case study recited by Ben & Jerry's CEO Jostein Solheim and Facebook COO Sheryl Sandberg (pictured). The ice cream maker has 3.4 million fans on Facebook.

The social network can get up to $700,000 a day for a logout page takeover.

Facebook ad campaigns can be extremely versatile, but many U.S. advertisers are not taking full advantage.

Advertisers are still coming to grips with Facebook. Many of them are still mastering the basics, such as collecting fans and posting news on their brand page's wall.

But outside the U.S. advertisers are doing really interesting things on Facebook. In India, they have Facebook pages for their various many-armed gods. In Brazil, there's an app that allows users to control a robot cat which patrols a wing of a museum. And in Colombia, a guy gave away everything he owned on Facebook.

All of it was sponsored. And it was all incredibly creative.

Facebook's new Timeline format allows advertisers to get a lot more creative.

Some, like Burberry, are really knocking it out of the park.

Facebook fans want to see photos and video, but advertisers too often just give them links and text.

Videos are 10 times more likely to be shared than links, and photos are five times more likely. Here's Pandemic Labs' (a Boston-based social media agency) infographic on the subject.

It also helps if you give consumers incentives to hit 'Like.'

Clothing line Stussy had this model take off an item of clothing the more people liked the page.

Other companies are making Facebook more directly transactional. Loyal3 wants to add a 1-click stock buying function.

By June of this year, public companies will be able to sell their stock to customers directly from their Facebook pages with no fees, no brokers, and in as little as $10 increments, San Francisco-based company Loyal3 said earlier this year.

Advertisers probably only get full value for money if they also use the other major social networks like Twitter, Pinterest and Google+

Fan engagement rates double when consumers encounter brands in other social media in addition to Facebook, according to a study of advertisers using social media by Vitrue, a maker of social media management tools and apps.

Facebook is trying really, really hard to get into the daily deals business a la Groupon. But it hasn't figured out the recipe yet.

Facebook announced it was bringing a new shopping deal product to its mobile platform in April: Facebook Offers--which looks a LOT like Facebook Deals.

Deals launched in November 2010, got off to a rocky start with The Gap, and then ... disappeared.

The recent Instagram acquisition adds another potential ad revenue line for Facebook.

Even though the company has no revenue there are at least five ways Facebook can easily bolt on ad media to the photo sharing app.

One of Facebook's biggest clients is ad agency holding company WPP, which will spend $400 million on Facebook this year.

WPP CEO Martin Sorrell has done an about-face on social media, a platform he once suggested wasn't terrifically useful for advertisers: His agencies (Ogilvy and JWT among them) will spend as much as $400 million on Facebook this year, according to MediaPost, double what they spent last year.

Facebook still faces trust and credibility issues with some consumers.

Blogher's 2012 survey of women and social media reveals that when it comes to women's faith in social media, 81 per cent trust newcomer Pinterest while only 67 per cent and 73 per cent trust veterans Facebook and Twitter, respectively.

These are the 11 most effective advertisers on Facebook, according to the company's own judges.

Facebook is itself a big advertiser.

Facebook spent $427 million on marketing and sales in 2011, up from $184 million the year before. That growth rate suggests its sales and marketing will easily blow past the half a billion dollar mark in 2012.

Now see how Facebook is going to start charging its users ...

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