Facebook Lures Advertisers at MySpace's Expense

Facebook has won over millions of users from social networking pioneer MySpace. It's becoming more alluring to advertisers, too.

Even as overall U.S. advertising spending on social networks declines this year, ad sales are on the rise at Facebook, and the company is gaining a larger slice of the pie at the expense of News Corp.'s (NWS) MySpace, according to a new report from marketing researcher eMarketer.

U.S. advertising on social networks will drop 3%, to $1.1 billion, in 2009, led by a slump at MySpace, eMarketer says. At the same time, Facebook's ad revenue will grow 9.5%, to $230 million. MySpace's ad revenues are expected to fall more than 15%, to $495 million, and its share of the roughly $1 billion market for social network advertising will slip about 7 percentage points, to 43%. Facebook's will rise 2.3 percentage points, to 20.2%.

Losing Its Visitor Lead

Over the next two years, the growing number of marketers flocking to Facebook will fuel an ad rebound, according to eMarketer senior analyst Debra Aho Williamson. "In 2010, as we start to come out of the recession, Facebook has all its guns going, and marketers will be putting more social media in [their budgets] where it makes sense," she says.

The shift underscores a rough patch for MySpace, which just axed 30% of its workforce. And the site lost its lead over Facebook in U.S. visitors in June.

The eMarketer report shows evidence of a growing willingness of companies to advertise on social media sites other than MySpace. That's good news for Facebook, which has in the past struggled to attract advertisers because of a perception that its users are not receptive to ads. Unlike search advertising, which frequently gets brands in front of consumers when they're looking to buy a product, social network users—the thinking goes—are too busy communicating with friends to care about ads.

Coke's a Facebook Fan

Williamson argues that more companies are approaching Facebook and other social sites on the advertisers' own terms—as places where they can communicate directly with potential customers in an informal way. Her report uses the example of Zappos, the online shoe retailer that rewards people who are "fans" of the brand on its Facebook page with special deals.

Facebook doesn't see any revenue from promotions like that, since any brand can sign up to have its own page on the site for free. But the analyst says that as more interactions like this prove successful, marketers will grow more comfortable investing ad dollars in the site. And Facebook executives have publicly discussed plans to work with advertisers in creating new types of interactive ads on the site.

"If Coke is doing a big banner buy on some content site, there's not really a good opportunity to interact, whereas in Facebook a user is coming to create something," says Tim O'Shaughnessy, the CEO of LivingSocial, a company that makes applications used by tens of millions of Facebook users. LivingSocial started working with companies like Coca-Cola (KO) to develop applications themed around their brands. About 100,000 people downloaded the Coke "Pick Your Five" app and used it to show to their friends "five things that make me happy."

Facebook Testing Virtual Currency

O'Shaughnessy says advertisers are increasingly interested in Facebook. In the past six months, his company has worked with about 25 brands, more than the company did in the previous year.

EMarketer's prediction of Facebook's 2009 ad revenues doesn't exactly gel with signals the Mountain View (Calif.) company has given about its overall revenues. For months, the company has been saying it's on track to increase revenue 70% this year. And on July 6, Facebook board member Marc Andreessen told Reuters that the company will generate sales of more than $500 million this year.

Williamson notes that ad revenues are only one piece of the pie: The company could be profiting handsomely from the sale of virtual goods. And in April, Facebook said it's testing a virtual currency system that could charge users for transactions.

    Before it's here, it's on the Bloomberg Terminal.