Facebook Marketing Boom Fuels Social-Advertising Startup Demand

Entrepreneur Michael Lazerow parlayed booming demand for advertising on Facebook Inc. -- and reassurances from its operating chief, Sheryl Sandberg -- into a business that generates almost $100 million a year in sales.

Lazerow, 37, founded Buddy Media Inc. in 2007 to help companies promote their brands on Facebook. Two years later, amid concern that Facebook would put him out of business by replicating his company’s services, he called Sandberg.

“Sheryl told me, ‘We want you to make a ton of money. We want to enable you with great technology,’” Lazerow said of the 2009 conversation with Facebook’s chief operating officer. “‘We don’t have aspirations to be in the enterprise software business.’”

Facebook’s decision to stay out the way, along with its surge in popularity, have spawned a cottage industry of startups like Buddy Media that help companies peddle their wares and brands on the world’s largest social network. Marketers eager to reach Facebook’s 845 million users pay these software-savvy go- betweens fees as high as millions of dollars a year to create pages where customers can get discounts, participate in contests and interact with fellow fans.

“They know the Facebook infrastructure inside and out, and they have developed interesting apps that marketers can tap into so they don’t have to reinvent the wheel,” said Debra Aho Williamson, an analyst at EMarketer Inc. in New York.

Market Doubles

The market for social-media management tools will more than double to $970 million in 2016, from $389 million this year, according to Forrester Research Inc. This category includes Facebook page managers such as New York-based Buddy Media, as well as so-called “listening platforms,” which let businesses monitor conversations about their brands on social networks.

Facebook gave social-media startups a broader range of tools for helping companies reach social media junkies yesterday, announcing its first foray into mobile advertising. Facebook, based in Menlo Park, California, also unveiled features that give businesses more flexibility in posting photos and other content while keeping closer tabs on interaction with customers.

Other social-advertising startups include Wildfire Interactive Inc., Vitrue Inc. and Syncapse Corp.

PepsiCo Inc. worked with Wildfire Interactive in October to create a “Dew Labs” Facebook page, where more than 6,500 fans of Mountain Dew post photos and videos of themselves enjoying the beverage and offer their opinion on new flavors. The company said it pays Wildfire $35,000 a year for the page.

‘Scores of Engineers’

Wildfire specializes in services Facebook can’t offer, said Victoria Ransom, chief executive officer of the Redwood City, California-based company.

“They’ve got companies like Wildfire and Buddy and others that have scores of engineers and people thinking all day long about how we can provide the best tools that will support a company’s advertising on Facebook,” Ransom said. Facebook “can focus on what’s core to them.”

The social-ad industry that has sprung up around Facebook is comparable to the search-engine marketing boom that followed Google Inc. (GOOG)’s emergence as the dominant Web-search provider. Unlike search marketers, which make money based on consumers’ interaction with search-related ads, social-advertising companies generate recurring sales of software subscriptions. That makes them comparable to business-application vendors like Salesforce.com Inc., said Jules Maltz, a venture capitalist at Institutional Venture Partners.

Comparable to Salesforce

“It’s analogous to Salesforce,” said Maltz, who is a Buddy Media investor and board member. “They are selling subscription software to directors and managers everyday and making it an essential part of their marketing.”

Advertisements are Facebook’s lifeblood, making up $3.15 billion in revenue, 85 percent of the total last year. Most of those sales are from marketers buying graphical advertisements on the right-hand side of profile pages. Increasingly, these ads direct users to brand pages on the social network, many of which are run by Buddy Media and its ilk, Lazerow said.

“We probably work with clients that represent 20 to 25 percent of all Facebook revenue,” Lazerow said. “Facebook is making significantly more money off of our clients than we are.”

Ransom estimates that for every dollar clients spend on Wildfire services, they may spend up to $10 buying Facebook ads.

Annie Ta, a spokeswoman for Facebook, declined to comment for this story, citing Securities and Exchange Commission restrictions on companies that have filed for an initial public offering. Facebook filed in February to sell shares in the largest-ever Internet IPO.

Facebook as ‘Frenemy’

Any company that relies on Facebook for revenue runs the risk of being overdependent, said Andrew Frank, an analyst at Gartner Inc. in New York.

“Facebook is a frenemy to many of these companies,” he said. “They have such market power in social media that they can make the rules.”

Frank cites the social network’s decision last year to force all game developers on its platform to cough up a 30 percent cut of sales from all virtual goods. Developers like Zynga Inc. had little choice but to fall in line, Frank said.

To help mitigate such risks, the social-ad startups are expanding their services to other sites, including Twitter Inc., LinkedIn Corp. and Google’s new social-networking service.

“That’s why they’re going to invest in LinkedIn and Twitter and Google+,” said Jeremiah Owyang, an analyst at Altimeter Group. “That’s how you keep Facebook honest.”

Fostering Social Advertising

For now, Facebook is doing more to nurture social-ad companies than by merely staying out of their way. Through its fbFund, Facebook invested in Wildfire in 2009. It also maintains a stable of 80 vendors, calling them “Preferred Developer Consultants,” that get an early peek at new products.

Facebook executives sometimes refer large advertisers directly to certain startups.

“They approach us and say, ‘We have a client that wants to do a major campaign and they have a short window of opportunity to have it delivered,’” said Don Beck, CEO of Involver Inc., a San Francisco-based social-ad company.

Acquisitions have become one way to win customers in social advertising. Social-ad service provider Context Optional was acquired last year by Efficient Frontier, the online-ad company later purchased by Adobe Systems Inc. Buddy Media said earlier this week it bought Brighter Option, a service for purchasing banner ads on Facebook.

“There is going to be a massive consolidation in the industry,” said Lazerow, whose company has raised a total of $90 million from venture capitalists and still has more than half of it.

To contact the reporter on this story: Douglas Macmillan in New York at dmacmillan3@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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