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The Boston Globe

Business

Facebook’s ad challenge

The challenge: making friends with advertisers while keeping friends it has

Facebook Inc. has a dilemma: How can it increase advertising revenue without alienating its network of 845 million friends?

The giant social network makes a fortune from advertising, selling $3.15 billion in online ads last year - 85 percent of the company’s 2011 revenue. But Facebook filed papers this week to make itself a public company; now it has to keep growing to be a good play for investors.

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To increase revenues, Facebook needs to leverage more of its vast storehouse of user data for the benefit of advertisers, analysts said. And that could be a gold mine for Facebook, or a curse.

The company continually collects all kinds of personal information from users, from the websites they visit to their favorite movies and TV shows. The trick for Facebook is to let advertisers use that information to target their messages without making its users feel their privacy is being violated.

By helping advertisers reach just the right users, Facebook could persuade more companies to exploit its unique platform, said Geoff Klapisch, an advertising professor at Boston University.

“Facebook needs to offer advertisers more targetability,’’ Klapisch said. “That’s what their point of differentiation is. That’s the home run for Facebook.’’

It is clear that advertisers already like Facebook. It delivers more than one-third of the ads that people see on the Web and promises that 65 million users could see a particular ad on a typical day. That’s more than twice the number of viewers that saw the TV commercials on last year’s “American Idol’’ finale.

“The problem isn’t just the role of ads, the problem is the role of ads in social media,’’ said Eric Clemons , an information management professor at the Wharton School of the University of Pennsylvania. “They have a dream demographic, but they haven’t figured out how to monetize it.’’

Facebook earned about $4 per user last year, according to the company’s figures; but with more users than Europe has people, the company should be able to do better, Clemons said. A figure that low “suggests that there is a structural problem with using this medium,’’ he said.

That’s not to say Facebook can’t make the medium work for advertisers, Clemons added, by moving toward growing ad revenue, and treading lightly to avoid scaring off users wary of being tracked by marketers.

Privacy has been a problem spot for Facebook. Last year, it settled complaints filed with the Federal Trade Commission over the lack of notification it gave users before changing privacy practices. In its filing Wednesday, Facebook said it takes those matters seriously.

“Our objective is to give users choice over what they share and with whom they share it,’’ the company said.

The irony is that the Web is already packed with targeted advertising that is fueling growth for Facebook rival Google Inc., which sold $26 billion in online advertising last year (most of its $38 billion in 2011 revenue). Those ads are not only visible on Google search pages, but, through its AdSense program, all over the Internet. And every time someone clicks on one of those ads, Google earns a cut.

“Google absolutely knows that I want to buy a home,’’ said Benjamin Edelman, a privacy researcher and assistant professor at Harvard Business School. “And furthermore, Google can show me ads that are relevant. Google uses the information that you give it right that moment relative to your interests.’’

The problem with Facebook, he said, is that its ads often don’t connect with the user. Facebook can’t respond quickly to search queries like Google can, or put the right ad before a user as he posts a message on his Facebook wall. “They show me a dating ad, when Facebook knows that I’m a married guy,’’ Edelman said.

Facebook could take a page from Google’s playbook, said Rich Levandov, a managing director at Avalon Ventures, a Cambridge venture capital firm, and end up emulating Google AdSense. “Once they built up their ad sales force, why couldn’t Facebook ads show up on the New York Times site?’’ Levandov asked.

If Facebook really wants to increase sales and limit ad saturation on its own site, it will do as Google does and let advertisers place ads across the Internet, Levandov said. “Google and Facebook are in this race to see who has the best data,’’ he said.

Michael B. Farrell can be reached at michael.farrell@globe.com.
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