Investors hope Facebook will eventually sell lucrative demand-fulfillment search ads, but it’s starting conservatively. Today it begins a small test of its first ads on Graph Search, but they’re not targeted to your search queries. Instead, they use standard Facebook targeting and retargeting, look like its sidebar ads, and appear at the bottom of the page — and only if there is more than one page of results.
[Update 9/30/2013: Facebook says it has concluded this test of Graph Search ads.]
Mark Zuckerberg hinted that ads would come to Graph Search when he answered my question about monetization at the launch event for the new internal search engine for people, places, and interests. He said “You build a good business by building something people want,” but noted that Facebook’s old search typeahead ads “extend quite nicely to this.” Zuckerberg stressed that user experience comes first at Facebook, but admitted search ads “could potentially be a business over time.”
But instead of search typeahead ads that let companies appear above their competitors or related businesses in the drop-down menu of real-time Facebook search results, the first Graph Search ads are really just a new placement. Facebook tells me that for now they’ll only appear to a small subset of users who have Graph Search, which itself is only rolled out to a small fraction of Facebook’s full user base. When people in the test do a Graph Search and wind up on the results page, if there are more results than will fit on one page, they’ll see two or three ads in a row below the fold and just before the second page of results auto load. The ads look like Facebook’s sidebar units with a headline, thumbnail image, body text, and that link to an on- or off-Facebook destination.
The Graph Search ads rely on the same targeting techniques as most of Facebook’s ads: biographical characteristics like age, gender, current city, and employer; Likes, Open Graph activity, and retargeting based on cookies from websites they’ve recently visited.
If the tests go well and the ads lead to clicks and brand lift, they’ll likely be rolled out to all Graph Search users.
The question remains whether Facebook will then start letting advertisers target based on the keywords people search. If combined with Facebook’s other targeting techniques, Graph Search ads could let businesses reach users as they’re making a decision about what restaurant, retail store, or professional service to go to. Right now Graph Search ads can only be targeted by demographic, interest, and browsing history, but eventually you might get ads for dentists when you search for “Dentists nearby.”
This bottom part of the purchase funnel is worth a lot more than the demand generation top of the funnel because the ads can be directly linked to purchases and return on investment. That would let Facebook charge more for them, and gain access to huge budgets reserved for Google and other search advertising. It’s this new category of ads, rather than subtle improvements to its existing revenue streams, that really get investors excited and could finally pull $FB (which closed today at $26.92) above its $38 IPO price.