When Facebook founder Mark Zuckerberg announced in May that his company would open its platform to third-party developers, a tingle ran up the spine of every ambitious programmer and Google-struck entrepreneur in Silicon Valley.
But while widgets make it fun to show that you've been to 167 cities or that your pimp name is Luscious Dynamite, the really heart-palpitating question remains: If Facebook is not selling ads on these widgets, who's going to make the money?
In the latest internet land grab, at least eight companies have launched advertising networks for Facebook widgets. The players include Lookery, fbExchange, Cubics, Social Media and the latest addition, Appfuel. Several content distributors, including RockYou and Slide, as well as video-solution provider VideoEgg, have also gotten into the ad game. But the specter looms: Facebook giveth, Facebook can taketh away.
Under the radar, Appfuel -- a five-person startup in San Francisco -- has been developing an application that fulfills what everyone knows to be the real opportunity: If a company can mine your Facebook profile to know who you are and what you like, it can show you targeted ads. Without storing any user data, says co-founder Sundeep Ahuja, Appfuel can scan a user's profile and deliver a targeted ad in under a second. For example, if you fancy The Fray, Appfuel's system will know the group is playing a concert near you tonight and will offer a link to buy tickets.
Ahuja does, however, acknowledge the elephant in the room: Facebook is likely preparing to do the same thing, as the Wall Street Journal reported in August (subscription required). Facebook says it already targets ads based on profiles. But so far, advertisements on the site do not appear to be closely matched with either users' profiles or the widgets they've installed.
While Facebook earned respect for ringing the come-and-get-it dinner bell to developers, that level of benevolence seems incompatible with its $10 billion ambitions and a possible march to IPO, particularly since the company is only pulling in an estimated $30 million in profit on $150 million in annual revenues. A more-targeted ad network, run by Facebook itself, would be one obvious way to increase the cash flow.
Ahuja shrugs off the risk, saying that if Facebook evicts his company, he'll take his technology elsewhere.
It's an attitude shared by Lookery founder Scott Rafer, who previously founded WiFinder, Feedster, MyBlogLog and Mashery. Twelve weeks ago, he and a partner launched Lookery, admittedly as a plain-Jane ad network. He's not even trying to make money -- all ad proceeds go to the application developers. "It was a provisional, 'Let's get in the game,'" he says. "What we needed to do was understand what's going on."
Rafer assumes that Facebook will launch its revamped ad service around the Ad:tech New York conference Nov. 5-8, so he plans to launch a new version of Lookery in October. Rafer also believes that Facebook has long-term ambitions to be a broad, Google-style advertising network on sites outside its own, trumping Google with the ability to precisely target ads to individual profiles.
For Rafer, the key is building up data on individuals. "Facebook isn't the only one with profile data," he says. "What we're trying to do is basically give all the smaller social networks a place to gang up and have their own ad network."
Facebook has little to lose in giving a crowded field of entrepreneurs a head start. Andrew Chen, who co-founded the ad-network business at Revenue Science and is now entrepreneur-in-residence at Mohr Davidow Ventures, points out one reason: Making money on Facebook is not that easy. "Social networks are some of the stickiest sites out there," says Chen. "They have very low click-through rates." In other words, users don't click on the ads. In a pay-per-click advertising model, like the one pioneered by Google, you want users to jump around the web, not spend hours on Facebook making virtual cocktails.
In addition, the data from these newbie ad networks runs through Facebook's servers, so Facebook will certainly learn from their successes and mistakes, and can do so in intimate detail.
The odds are long for any of the startup ad networks, but the speed of change since Facebook's May announcement shows how radically the equation can change in an instant. Look at it this way: If the ads on our screens become offers we actually want, we all win -- even if it leaves a few startups by the side of the road.
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