Facebook's Big Bet

Yesterday at Web 2.0 Summit, Mark Zuckerberg sat on stage and told John Battelle that the future of Facebook lies in advertising, when responding to the question of how Facebook is going to make money from Connect. In other words, Facebook has a future in advertising outside of their “walled garden” and will eventually place ads on other pages.

This isn’t really news but it’s the first time that Zuckerberg has publicly stated their intention to move beyond the site for advertising purposes. Last October I wrote that Facebook had tested a cookie-based system for generating external advertisements. The quickest path to integrating Facebook Ads beyond the Facebook website is through Connect which makes a user’s data accessible on other websites.

Facebook Wants To Be the Standard

One thing that Mark Zuckerberg emphasized on stage yesterday was that Facebook still has a shot at becoming the standard. At the UX Summit in October, Facebook was on hand to tell the open source group about their experience with building Connect. One of the key takeaways for John McCrea was that open source products need to look good.

Facebook Connect is far along in the process of being able to roll out the service entirely and at this point it is a race against those trying to develop the “open stack”. When I reference the “open stack” I am referring to the one which John McCrea and many other portable identity evangelists describe (and is pictured below thanks to John’s flickr album). The “open stack” includes Open ID, XRDS, OAuth, a PortableContacts layer, and OpenSocial.

For those that are less technical, it’s not really important to know how these technologies interact. It is just important to know that this is what Facebook Connect is competing with to become the primary identity standard on the web.

-Open Stack Screenshot-

Where’s Facebook’s Value?

As Mark Zuckerberg said on stage, Facebook is an advertising business. I would argue that Facebook is furthest along in developing a simple platform for creating ads that target users based on a variety of demographic factors including gender, age, location, and interests. While MySpace has launched their own self-serve advertising platform, the targeting capabilities are not as advanced as Facebook’s and ads are currently limited to the United States.

In the future, visitors to websites won’t be just a number in our analytics services. Instead, we will have access to incredible identity information and Facebook is positioning themselves as the primary identity provider. They are focused on developing the most advanced targeting system to leverage the data made available. This is going to be one of their core competencies and this could eventually become one of the largest (if not the largest) advertising solutions on the web.

Who wants to compete with Facebook in this space? Well aside from MySpace who is already working on rolling out an external facing service, Google.

If Facebook Loses As A Standard

There is no doubt that Google is actively working on developing the algorithm that optimizes advertisements based on granular demographic data. As this information becomes increasingly ubiquitous through Facebook Connect or the “Open Stack”, companies will compete to provide the best targeted advertisements.

While Facebook is properly positioned to benefit from this, the success of Facebook Connect is a relatively critical component of the company’s future success. If Facebook Connect succeeds, the primary advertising platform that will be able to leverage Facebook’s data is of course Facebook. So what if Connect doesn’t win as a standard?

Well, you can guarantee that Google, MySpace, and others are going to rush in to seize the unfulfilled monetization opportunity. While Facebook could succeed in a world of open standards, it’s a much friendlier environment to play in when you’ve defined the standard. Facebook is betting big on the success of Connect and if it fails to become the standard, I would argue that Facebook is going to have a lot more competition when it comes to targeted advertisements.