Peter Kafka

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Facebook’s Ad Business Is a $3 Billion Mystery

So the numbers are out, and we know that Facebook’s ad business really is huge. And it really is growing like a weed. Just like we thought.

But how exactly does Facebook’s ad business work? We still don’t know a lot about that part.

The S-1 mentions “advertising” 123 times, and “advertisers” another 117 times. But when it comes to describing how the company actually sells advertising, it is vague.

We know that some of Facebook’s ads are sold via an automated self-serve system, and some are sold via sales teams working in 30 offices around the world. And we know that Facebook uses an auction system to price some of its inventory, and that it lets advertisers target users to some degree, based on their demographics and interests.

But Facebook doesn’t break any of that out in its filing. It simply has one big bucket labeled “advertising.” There’s no discussion of click-through rates, or the size of the average ad buy, or what percentage of ad buys come from repeat customers, or how “lumpy” its sales are.

The company does mention that last year revenue increased, in part because it served up 42 percent more ads, and in part because it was able to charge an average of 18 percent more for each ad it served. But it doesn’t get any more specific than that.

Not that we should expect much more in an S-1. When Google went public eight years ago, its description of its ad business was also pretty vague (here we note that Facebook is stocked with Google expats, starting at the top, with COO Sheryl Sandberg). But by the time of the Google IPO, lots of ad folks had a decent grip on AdWords, its one key offering.

Facebook doesn’t have an AdWords, but a mix of stuff that it is playing with. It admits that this is a work in progress: “Advertising on the social web is a significant market opportunity that is still emerging and evolving. We believe that most advertisers are still learning and experimenting with the best ways to leverage Facebook to create more social and valuable ads.”

Given that Facebook generated a crazy $3.15 billion in ad revenue last year, up from $764 million two years ago, that seems to be a pretty awesome experiment. But Facebook itself seems to think things will need to change.

That’s why, for instance, it is pushing the industry to measure its ads using “gross ratings points” — the same metric buyers use for TV — instead of “traditional” Web metrics like impressions and click-through rates.

And that’s why a good chunk of the S-1 talks about the overall market for advertising — not just Web advertising, but all advertising. The message: There is a lot of money being spent on ads, and as we get even bigger, and smarter, we’ll figure out how to capture more of it.

And at some point they may share some of that knowledge with the rest of us.

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Just as the atom bomb was the weapon that was supposed to render war obsolete, the Internet seems like capitalism’s ultimate feat of self-destructive genius, an economic doomsday device rendering it impossible for anyone to ever make a profit off anything again. It’s especially hopeless for those whose work is easily digitized and accessed free of charge.

— Author Tim Kreider on not getting paid for one’s work