The Impact of the Facebook Exchange

Facebook recently confirmed plans to launch a new service that will enable real-time bidding for ad space on its platform (read more on the announcement here and here). The service, known as Facebook Exchange, will allow companies to target ads to users based on their browser history gleaned from visiting third-party websites. These retargeting options will be meaningful to direct advertisers and will create new revenue for Facebook. However, it is still unclear whether it will drive user engagement after the click.

The concept behind Facebook Exchange isn’t new – Google and others have been using retargeting cookies for years within their ad networks. But Facebook’s service will allow advertisers who have a timely message or promotion to take advantage of the billions of impressions available on Facebook.

A common example has been used to illustrate the potential benefit of Facebook Exchange: A user who has visited travel sites to research a trip to Hawaii may later see a promotion on Facebook about hotels in Hawaii on the basis of searches done outside of Facebook. Previously, that same user would not have been targeted by a travel-related website via a Facebook direct buy if Hawaii wasn’t listed as one of their Likes.

Facebook Exchange likely will drive up the cost of ad placements on Facebook due to the impression bid model and requiring the demand-side platform to compete for ad space within Facebook.

It will be challenging to determine the value and effectiveness of the ads purchased via Facebook Exchange. According to the latest comScore study, users who were exposed to Facebook ads were 16% more likely to buy products from a brand than users who didn’t see such ads. This is great for advertisers who are looking to drive awareness of their brands, but it doesn’t answer the larger questions around engagement and advocacy.

Because Facebook Exchange will only target users based on their activity outside of Facebook, it will likely work best for advertisers who are looking to drive users to a promotion or event, as opposed to driving fan acquisition and engagement. This will ultimately be the downside of Facebook Exchange – since Facebook is inherently about engagement – so it will be interesting to see how Facebook Exchange will increase fans and “talking about” metrics for brands.

Two other concerns emerge. Despite the commonality of the practice on the web in general, it remains to be seen if users will view Facebook placing cookies on their machines as another encroachment on their privacy, as well as how Facebook Exchange will work in the mobile space. Opting out will only be available through participating third-party websites. And Facebook is already seen as lagging in mobile, although their recent rollout of their own App Center – featuring apps that use Facebook login – should drive usage of third-party apps that will, in turn, provide more user data to sharpen ad targeting

Facebook Exchange will undoubtedly increase revenue for Facebook, which seems to be at the top of the to-do list since their IPO was announced. It comes at a time when the company urgently needs to quell street fears that Facebook’s long-term strategy for ad revenue growth is inadequate.

For advertisers who are already using exchanges, Facebook Exchange could be a way to extend their overall reach. However, advertisers who have been primarily focused on fan acquisition and building their community on Facebook may not be satisfied with the effectiveness of this service at driving engagement and fan acquisition. And we will have to stay tuned to see where ads will fit in with Facebook’s latest efforts to monetize its ever-growing mobile presence.