// Facebook biz model is still locked in a tradeoff between user satisfaction and ad revenue.
// The tradeoff is similar to that of Yahoo's circa 2000. At the time, Google found a way to break the tradeoff and eventually displaced Yahoo as the web leader.
// despite Facebook's current dominance, they are still vulnerable.
(Bloomberg ) Facebook Inc. (FB) has decided not to push the limits of how many online advertisements people can tolerate.
The world's largest social-networking company said this week that it doesn't plan to increase the balance of ads that it shows to users in their news feeds, the main hub for content on its services. Facebook said ads took up 5 percent of the posts in news feeds in the second quarter and have risen only modestly since then. That amounts to about one ad for every 20 photos, status updates or other posts.
Chief Executive Officer Mark Zuckerberg is trying to keep users happy with plenty of content from their friends without distracting people with ads, while inserting enough marketing messages to boost revenue. The delicate balancing act is one that Internet companies from Twitter Inc. (TWTR) to LinkedIn Corp. (LNKD) also face and will affect how they generate sales over the long run.
Now the Menlo Park, California-based company will need to increase revenue by pulling other levers, including higher ad prices and more user accounts.
"You've got to find other ways to monetize other than increasing the volume of ads," said Hussein Fazal, CEO of AdParlor, part of AdKnowledge, a digital marketing firm. "It's just all about user experience. The one thing that scares investors in Facebook the most is that people start using other sites outside of Facebook -- and ads could be a big reason."
Users Engage
The company is pulling back on an ad expansion even as users are engaging more with the service. Daily active users rose to 728 million in the third quarter, or 61 percent of the monthly-active user base, from 58 percent in the year-ago period. At the same time, revenue surged 60 percent to $2.02 billion, exceeding the average projection for $1.91 billion, according to data compiled by Bloomberg.
"As we think about the future, we do not expect to significantly increase ads as a percentage of News Feed stories beyond where we were at the end of" the quarter, Chief Financial Officer David Ebersman said.
With news feed ads, promotions are placed amid updates from friends, including on desktop computers and on mobile devices, which is driving sales growth. So someone can see a promotion for McDonald's Corp. (MCD) between baby photos and engagement announcements. By contrast, traditional online banner ads are stuck in a static area of a Web page or on a smartphone.
Setting Precedent?
"We are very focused on managing this for the long-term to create a great experience for users because ultimately that's what's most valuable for them, and advertisers who want to reach them," said Will Cathcart, product management director at Facebook.
The results of Facebook's decision will be closely watched by competitors such as Twitter and LinkedIn that also place ads in content feeds that can be scrolled through on desktops and mobile phones, said James Borow, CEO at Shift Inc., which specializes in social marketing.
"People will continue to see that Facebook's respect for the user will lead to monetary success," Borow said. "If you get people using your service more and more, you do have more opportunities to monetize, and I think that's a precedent they're setting."
Companies that overwhelm Web surfers with ads pollute the experience, said Clark Fredricksen, an analyst with EMarketer Inc. in New York. Facebook's former nemesis, MySpace, forced more advertising on users after the company was purchased by News Corp. (NWSA) in 2005 for $580 million and members eventually tired of the excessive marketing, he said. News Corp. agreed to sell MySpace in 2011 for $35 million to Specific Media Inc. after it lost its lead to Facebook.
Cluttered Experience
"Ultimately, that contributed to a very cluttered user experience that, combined with the emergence of Facebook, contributed to its downfall," Fredricksen said. He added that the balance of ads is less important in pushing revenue increases than growth in users and pricing of ads.
That benefits Facebook, with Ebersman noting that the average price of online ads rose more than 40 percent in the third quarter compared to an increase of 13 percent in the second quarter. In the U.S. and Canada, mature markets for the company, the gain was more than 60 percent, he said.
As Facebook limits the frequency of its ads, the company is also working to increase their quality. It is getting help from outside marketing developers, who are building custom tools and features to manage and evaluate the effectiveness of advertisements for their own customers. On a call with investors this week, Facebook Chief Operating Officer Sheryl Sandberg said the program is an "important trend influencing our growth."
More Resources
Facebook also moved over sales executive Mike Randall three months ago to run the preferred marketing developer program. He will focus on developers who have international and mobile experience, areas where Facebook wants to better target users with ads. Many developers also have expertise in industries like pharmaceutical and auto, so they can build better tools for Facebook marketers and take a cut of the profits.
"There's so many marketer objectives that it would be nearly impossible for us to follow all of those on our own," Randall said. "We've had an ecosystem out there for a while, but now we have to take the next step and focus on the developers in the areas that are important to Facebook."
Last month, Facebook said it was expanding a service to let companies target users based on their online activity outside of the social network. Facebook's Instagram photo-sharing service is also set to start selling promotions.
A limit on ads can be good for advertisers as well, especially since they want promotions placed on services that people actually visit online, said John Tuchtenhagen, a vice president at Publicis Groupe SA's Digitas unit.
"We want to reach users in an environment that they enjoy and that they positively connect with," Tuchtenhagen said.
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