Banner ads on Facebook is a dumb way to monetize. Same on MySpace. People don’t pay attention to banner ads on social networks because they are too busy paying attention to EACH OTHER. It’s no surprise that people are complaining about low click through rates on Facebook display ads. But that doesn’t mean that Facebook won’t figure out how to monetize its growing userbase. Let’s not forget that even Google took a while to figure out how to monetize — and the first version of AdWords was based on a fixed cost per click rather than the liquid marketplace that now cranks out $10 billion a year.

So how can Facebook monetize? Well, let’s look at Google’s breakthrough. Google’s core search value proposition is serving up links to relevant sites. AdWords ads on Google search pages also serve up links to relevant sites — a perfect value match.

So what is Facebook’s core value proposition? Connecting and communicating with friends. So can Facebook sell companies the ability to connect and communicate with Facebook users as “friends”? Well, the problem with that is that most people don’t want to be friends with companies. The beauty of AdWords is that the user interaction with the organic link and the paid link is exactly the same — click and find something relevant.

How, then, can Facebook allow companies to buy their way into real connections between friends? Companies that have built Facebook apps have benefited from real criends connections through Mini-Feed notifications that one of your friends has added an app. Having companies buy their way into the Mini-Feed would probably corrupt the value of the feed pretty quickly. The beauty of the viral marketing of the Facebook apps is the my friend is actually USING the apps.

What if there were a way for companies to identify which Facebook users were actually using their products, and then create a mechanism for the users to highlight their use of the product to their friends — and then put those users into the economic value chain.

I’m just making this up — but it’s clear that Facebook and other social networks are in need of the aha moment that happened at Google when someone realized — hey, if we rank the ads based on RELEVANCE as well as price bid, then people would be more likely to actually CLICK on the ad, and we’d make more money.

Scott Karp

Scott Karp is the Editor of Publishing 2.0, a blog about the convergence of media and technology. This piece was originally published on Publishing 2.0 and is posted on DMW with the author's permission.

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Flickr Photo Credit: BeFitt

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