Social Media's Advertising Revolution

How Facebook Will Upend Advertising

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

Excerpted from 5/27/09 BusinessWeek article 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.

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.

The Holy Grail of ads: word of mouth

...We're on the verge of a major rethinking of advertising's fundamental premises. One of the biggest challenges facing advertisers is ad credibility.

...Word of mouth—peer opinion—has consistently been rated the most credible source of information. But traditionally there's been a limit as to how widely you could distribute a friend's point of view.

Credibility now has a channel for mass distribution. It's called the Web and it particularly thrives in social networks. Such distribution will have profound implications for how we "advertise."

...Social tools woven into various sites can deliver the opinions and reviews of a group—"people like me"—whose views may be just as credible as those of my friends.

In sum, social networks and related tools are transforming the way companies communicate with consumers and potential consumers in profoundly interesting ways.

Now it's up to the advertising industry to get its collective head out of the sand and exploit this transformation to its advantage.

Jonathan Yarmis is founder and principal analyst with the Yarmis Group, an independent analyst group.

My Take

Advertisers will look back wondering why it took so long to see the obvious - instead of hindering their prospective customers' Web experience with annoying ads, they should use social Web tools to derive actual value from the ads' results.