Facebook's test: Building on ad revenue

By Cecilia Kang
Washington Post Staff Writer
Saturday, July 24, 2010

Facebook may be growing like gangbusters, but the question clouding the storybook rise of Silicon Valley's latest phenomenon is whether it can figure out how to make money at the same pace.

And although the social-networking site gets a daily flood of new users around the globe, Facebook's long-term success might be challenged by something at the heart of its core business: sharing information.

The site, which passed 500 million users this week, says it's generating enough revenue from advertising to cover its costs. The company is privately held but has its sights on going public one day. It doesn't charge its users, and chief executive Mark Zuckerberg said this week on ABC News that it never will. (Washington Post Co. Chairman Donald E. Graham sits on Facebook's board of directors).

Facebook's lifeblood is the exchange of information -- people making more online friends and trading more pictures, news stories, music and one-line mood updates -- which also happens to be sheer gold for advertisers. Experts say the company treads a delicate line in getting its users to share more information without alienating them through overexposure.

Federal regulators and privacy groups say the company has been testing the limits of consumer privacy online, and have suggested establishing clearer guidelines for such sites.

"Facebook is in a conundrum," said Jeremiah Owyang, an industry analyst at San Francisco-based Altimeter Group. "The promise they've made is to be closed, or restricted, on who can see what. But the more information they make available to outside networks, the more monetization they have."

Facebook, meanwhile, says its business strategy doesn't rely on selling information about its users. The company says it doesn't give user data directly to advertisers but instead places ads from its partners on the pages of users based on its own analysis of aggregated demographic information.

When the firm shifted its policy on user information in December, exposing some data about users more broadly on the Web, critics said the move was intended to generate more revenue from advertisers who want to tailor ads to specific profiles of Facebook users. But Facebook said users get more out of the social-networking site when they reveal more about themselves to others. If they don't want that, they have the option to keep information such as their sex, education, religious beliefs and social connections under wraps.

"There's a big misperception that we're making these changes for advertising," Zuckerberg said on a media call this year, when the company announced it was dialing back some of the changes. "Anyone who knows me knows that that's crazy."

The issue of online privacy has gained more attention this past week, with two bills in motion in the House that seek for the first time to create rules for how Web sites can collect and share information about their users to advertisers and third-party marketing sites. One bill, introduced this week by Rep. Bobby L. Rush (D-Ill.), seeks to give the Federal Trade Commission the authority to create a policy on Internet privacy. The Senate Commerce Committee will hear next week from FTC and Federal Communications Commission leaders, as well as representatives from Google, Apple, Facebook and AT&T, in a hearing about privacy.

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