Facebook Connect + Facebook Ads = A Social Ad Network

The push to ramp up revenues is clearly on at Facebook. If Mark Zuckerberg wants to prove Facebook’s valuation (something he won’t budge on for new investors), he is going to have to start showing some serious revenues. That means figuring out how to make social advertising pay. At Davos, Facebook COO Sheryl Sandberg told us to expect to see “the evolution of the advertising products” this year. One big evolutionary step the company is working on is the combination of Facebook Connect and Facebook Ads, in effect turning Facebook Connect into a social ad network. We’ve learned this from two independent sources, one with direct knowledge of the product. Asked for comment, a Facebook spokesman offers the following statement:

We are always looking at new opportunities for our developers but have not launched anything new. Last month, we did announce that we are working with a few developers to test the placement of Facebook Ads within their applications specifically on Facebook.com as part of our efforts to help developers monetize. The results of those initial tests will help us determine if and how we could extend Facebook Ads to additional applications and developers in the future.

The introduction of ads through Facebook Connect is an obvious way to expand revenues, and our sources say it is part of Sandberg’s larger efforts to do so. Just last month, as the statement notes, Facebook began testing ads for the first time on third-party application pages. It also introduced a commenting widget for sites that use Facebook Connect which expands the footprint of FB Connect on sites that install it. One can imagine other Facebook Connect apps, and even third-party apps, appearing on partner sites. The more real estate those apps take up, the more room there will be to insert an ad or two.

Our understanding is that the ads will initially appear on this expanding real estate rather than in traditional advertising spots, where Facebook would have to compete directly against Google, Yahoo, and all the other established ad networks. Given the known under-performance of ads on Facebook’s own site and social networks in general, that is probably a prudent strategy.

For now, Facebook Connect remains a developer program for partner sites to allow visitors to sign in using their Facebook ID and voluntarily exchange data about their activity on those sites back to their Facebook friends via their activity feeds. But targeting ads to Facebook members on partner sites through Facebook Connect could become a potentially powerful revenue generator. At the very least, it would multiply Facebook’s available advertising inventory beyond its own site. At most, it would create better returns by letting Facebook place highly targeted ads in different contexts where people may be more receptive to them.

One of the reasons ads perform so poorly on social networks is because they are the worst place to show someone an ad. People on social networks tend to be in a socializing mode instead of a shopping or information-gathering mode. But if you show the same people an ad on another type of site (say, a clothing ad on a fashion blog), and you can target that ad based on their social profile (you know their age, gender, and where they live), that in theory should be a formula for better response rates. Facebook started down this road before with Beacon, before that effort blew up in its face because of privacy concerns. So it has to tread carefully. But it learned from Beacon, and FB Connect is completely opt-in. So far, it is a success.

Now it is time to make money off of it, and leverage the data Facebook has about its 175 million members. And have no doubts: If Facebook doesn’t create a viable social ad network, somebody else will. In fact, all the major social networks have plans to use access to their members, and their member data, as a wedge to create social advertising networks that can target ads based on profile or demographic data. For instance, Google Friend Connect, Google’s answer to Facebook Connect, is laying the groundwork for what Google insiders call “Friendsense” (Friends + AdSense). Even MySpace and AOL are working on their own flavors of socially-targeted ads. While these efforts are all couched in terms of making it easier for consumers to share data about themselves between the sites they care about, don’t be fooled. They are less about sharing data than about targeting ads.

This is the next evolutionary step in online advertising. it is only a matter of when, not if, it will occur.