How Facebook Will Upend Advertising

Source: BusinessWeek.com

With social networks like Facebook transforming the way companies communicate with consumers, it’s time for the ad industry to get its head out of the sand.

 By Jonathan L. Yarmis

The guessing games over Facebook’s worth are back on again. They were reignited by the news on May 26 that Facebook has accepted a $200 million investment that values the company at $10 billion.

Much of the discussion centers on the ability, or lack thereof, of Facebook and other social networks to sell advertising and deliver advertising results. People get on Facebook to socialize, not hunt for products—or so the argument runs.

But that argument misses the point. The question isn’t how advertising will work on Facebook but rather how Facebook and social networks like News Corp.’s (NWS) MySpace are changing advertising. I’m loath to affix the 2.0 moniker to yet another phrase, but if ever an industry needed to be 2.0-ized, it’s advertising.

Almost a century ago, retailer John Wannamaker is reported to have said: “Half of all advertising works, I just don’t know which half.” Today the percentage may be far lower. On the Internet, click-through rates have fallen precipitously as clutter has replaced clarity. These days an ad has performed exceptionally well if at least 1 in 10 people who see it click on it. Much of the time click-through rates that once approached 3% are more like 0.3%.

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