Don't Look Now, but Facebook Is Getting Serious

The network is coming, folks, whether Facebook (Nasdaq: FB  ) admits it or not (and it hasn't yet): Recent developments have put the company even closer to the point of launching its own third-party ad network.

Last week, I commented on how launching a third-party ad network, or a system where Facebook would serve targeted ads on websites other than its own, could be a positive near-term catalyst for Facebook investors. Why? The move would open up sizable near-term revenue opportunity, boosting the top-line growth prospects that have been weighing on shares since the IPO.

So what's the news? On Friday, Facebook ads and sponsored stories, the same kind you see on Facebook.com, started showing up on Zynga.com. While this was an something we knew a little bit about, given that Facebook disclosed its Zynga (Nasdaq: ZNGA  ) agreements before the IPO, we didn't have a timeline on the launch until now. Classifying Zynga as a third party might be a bit of a stretch, considering the close relationship the two companies have, but rolling out with a such a close partner before a more general rollout makes logical sense to test the waters.

Running the numbers
So what's the potential revenue opportunity here? Obviously, it won't be huge at first, but we can get a sense for how big it could be by looking at Google's (Nasdaq: GOOG  ) display network, the largest ad network existing today. Currently, Google generates around 30% of advertising revenues from its network partners, an amount that exceeded $10 billion in 2011. However, back in 2004, network partners accounted for nearly 50% of total revenue.

Of course, this isn't a perfect comparison because of large search partnership Google entered into, but it provides some directional sense for the possibilities at Facebook. With trailing advertising revenues of around $3.5 billion, it's reasonable to think a new ad network at Facebook could add an incremental $750 million to $1 billion to the top line within its first two years of existence.

Foolish bottom line
While we won't see a Hollywood production of The Third-Party Ad Network anytime soon, and it still could be a while before an official rollout takes place, the writing appears to be on the wall. I think that with big-name advertisers such as Coca-Cola (NYSE: KO  ) and Ford (NYSE: F  ) recently announcing their intentions to boost spending on Facebook, the additional format options, as well as the added reach an ad network offers, would not only boost Facebook's share of ad budgets but also open up an entirely new client base.

Bottom line: Friday's news is just one more indication that Facebook is getting more serious about driving the top-line growth investors want -- just what it needs to help sway its army of skeptics.

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Brenton Flynn doesn't own shares in the companies mentioned. The Motley Fool owns shares of Ford, Facebook, Google, and Coca-Cola. Motley Fool newsletter services have recommended buying shares of Coca-Cola, Ford, and Google and creating a synthetic long position in Ford Motor. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On June 25, 2012, at 3:38 AM, jacobandersen72 wrote:

    ford and coke are on facebook's board of advisors. they are not impartial. they are simply pumping facebook as they are required to do.

    I hope the FTC/SEC blocks Facebook from buying one of its strongest competitors -- Instagram. Instagram is a photo based social network that now has 65,000,000 users. its one of the strongest competitors facebook has seen to date. Facebook has network effects. Without network effects Mark and Co. would have had strong competition a long time ago. Instagram is one of the few companies that found a hole in Facebook's armour through its early jump on mobile platforms. It would be a shame to simply watch Facebook buy away the competition. Do the right thing FTC/SEC and block the buyout. Make Facebook compete.

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