Feb. 28 (Bloomberg) -- Facebook Inc., under pressure to expand sales from its 1.1 billion users, is pushing into a business that lets marketers buy advertisements in real time on the basis of a member’s Web-browsing habits.
Facebook Exchange, a five-month-old service that generates automated ad buying as users click around the site, so far has more than 1,300 customers, Chief Operating Officer Sheryl Sandberg said on a call last month. Now, the company is broadening Facebook Exchange’s global footprint, with plans to expand in Asia and Latin America.
Chief Executive Officer Mark Zuckerberg is using the exchange and other new ad services to accelerate growth and keep alive a 52 percent stock rally from a record low in September, when shares slumped to less than half their May initial public offering price. Facebook Exchange, projected to generate $460 million in sales this year, is designed to help Facebook narrow the gap with Google Inc., which according to EMarketer Inc. leads the $15 billion U.S. display-advertising market.
“They are chasing a new pool of money,” said Brian Wieser, an analyst at Pivotal Research Group LLC. “The exchange is going very well, and could contribute meaningfully to ongoing revenue acceleration.”
While most of Facebook’s business is driven by ads using information gleaned from user profiles, Facebook Exchange lets marketers target people based on websites they visit. For example, those browsing car sites may later see promotional ads for a new sedan or truck on Facebook.
To succeed, the social network will need to ensure that the exchange doesn’t trigger a backlash from consumers put off by tracking tools known as cookies, which share anonymous data about where a person has spent time online. Facebook also will need to grapple with Google and Yahoo! Inc., which have more than a decade’s head start in Internet-display advertising.
Those are worthwhile risks for a company seeking to bolster revenue growth, which analysts project will slow to 31 percent this year, from 37 percent in 2012. Facebook Exchange will probably generate $460 million in sales this year, or 7 percent of the total, said Wieser, who rates the stock a buy.
Investors, who sold stock last year on concern about the prospects for growth in Facebook’s mobile-advertising service, now value the social network at 47 times projected 2013 profit, compared with 18 for Google on the same basis.
Facebook Exchange got its start in the months before the Menlo Park, California-based company held its IPO. Gokul Rajaram, the head of ad products, said in an interview that he was looking for new ways to boost revenue when a member on his team, Antonio Garcia-Martinez, proposed the idea of an exchange.
While other forms of advertising work well on Facebook, the exchange would open ad inventory to marketers previously shut out of the social network. The Web population spends 11 percent of its time on Facebook via desktop computers, and 23 percent via mobile devices, according to ComScore Inc.
Rajaram took the idea to Sandberg around the beginning of April 2012, just weeks before the IPO. She approved it, saying Facebook Exchange could satisfy demands by advertisers that the social network be a part of the extended display-ad market.
“It was a break from past thinking,” Rajaram said. “It really changes the kinds of ads that people see on Facebook, because it’s not just based on your likes, your interests.”
The service is built to ensure that users’ identities are kept anonymous and that their data isn’t shared with outside providers buying ads on the exchange.
Facebook Exchange lets advertisers compete to automatically place ads in milliseconds as its members refresh pages, a process known as real-time bidding. That market is expected to more than double to $7.06 billion in 2016 from this year, making up 28 percent of U.S. display-ad spending, EMarketer said.
Facebook’s biggest challenge lies a 15-minute drive away at Mountain View-based Google. The search engine provider dominates the online ad-exchange market with a share of at least 50 percent, according to Wieser, thanks to its $3.24 billion acquisition of DoubleClick in 2008.
Google, which offers access to websites globally and for mobile devices, will be aggressive in defending its turf, Wieser said.
While Facebook Exchange is projected to bring in 6.9 percent of the company’s projected 2013 revenue of $6.68 billion, it hasn’t lived up to predictions of analysts at Sanford C. Bernstein & Co. because of a lack of advertisers and adoption.
“It is difficult to come up with quarterly estimates for revenue streams that are so new, growing so fast, and so dependent on yet-unknown consumer behavior,” Carlos Kirjner, an analyst at Sanford C. Bernstein, wrote in a note.
Facebook Exchange may have contributed $20 million to $30 million in the latest quarter, according to Kirjner. The service could provide “upside” in the future, he said.
To boost results, the company is looking to expand Facebook Exchange globally to help more marketers reach users based on their Web-browsing history, Scott Shapiro, a marketing manager at Facebook, said in an interview. Mobile ads sold via real-time bidding are also an untapped growth area.
Facebook Exchange could be enhanced further, said Zach Coelius, CEO of San Francisco-based Triggit Inc., which helps advertisers use the exchange to reach customers. Facebook could place ads elsewhere on the social network, making them more prominent by moving them beyond the right column of a profile page, he said.
“We’re very encouraged by what we see, both in terms of marketer demand and ad performance,” Sandberg said on the January earnings call. “We see good data from our clients and customers that it’s driving more conversions.”
Some advertisers are already spending tens of thousands of dollars a day on Facebook Exchange, and that could rise to around $100,000 daily in the future as the platform matures, according to Joe Zawadzki, CEO of New York-based MediaMath Inc. His company offers data and tools that help advertisers analyze and improve digital-marketing campaigns.
While some real-time bidding at Facebook may have been discretionary or in test budgets in 2012, some advertisers are now adding Facebook Exchange as a specific budget item, he said.
“The potential is tremendous,” Zawadzki said. “Facebook is a really powerful advertising medium.”
--Editors: Reed Stevenson, Rick Schine