Peter Kafka

Recent Posts by Peter Kafka

Facebook Exchange Will Be Big, but Not Big Enough to Stop Slowing Web Ads

Good news for Facebook and all the ad tech companies working on its Facebook Exchange program: It looks like Facebook’s new ad-targeting plan really is going to be a big deal.

The not-quite-as-good news, at least for the ad-tech guys: It looks like the Exchange is always going to be a side project for Facebook.

So says Bernstein Research analyst Carlos Kirjner, who figures that Facebook Exchange ads, which let advertisers pitch you based on your Web traffic history, will only end up accounting for 15 percent to 20 percent of Facebook’s old-fashioned Web ads. Those are the ones that run on the right side of the service’s page when you look at it on a PC.

That’s still a very big business, since those are the ads that generate about 80 percent of Facebook’s advertising business right now. But Facebook’s future is based on “newsfeed” ads — particularly the ones it will show mobile users — and Exchange targeting won’t work there.*

And Kirjner figures that the Facebook Exchange will be capped when it comes to its conventional ads, too. That’s for two reasons: He says there simply may not be enough demand to turn Facebook’s huge pool of regular ads into retargeted ones. And he says Facebook will move slowly with this stuff to avoid setting off alarms with U.S. and European regulators, who are already sniffing around retargeting and privacy issues.

But even if the Facebook Exchange plays a limited role for the company, it’s still an important one. Kirjner predicts that Exchange ads will help slow the decline of Facebook’s conventional ad business, which is dropping off as users head to the mobile Web.

If the Exchange wasn’t around, he says, conventional ad pricing would drop 5 percent next year, and 5 percent the year after that. But after factoring in the growth of Facebook Exchange, which adds a big pricing premium, Kirjner figures those ads will remain flat next year, and drop a bit in 2014.

That is: Without the Exchange, this chart would show a much steeper drop.

*Kirjner does think the company’s first efforts at mobile are working, by the way, and has moved his rating from “market-perform” to “outperform” — in conventional English, that’s a “buy.”

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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