Facebook's ad retreat: Tactical shift or costly setback?

Three weeks ago, Facebook chief executive Mark Zuckerberg boldly prophesied that social networkers would welcome targeted marketing endorsements over regular ads because they'd be integrated with conversations users were already having.

He was wrong.

Last week, his site was forced to tighten privacy controls on its controversial new "Beacon” advertising tool after 46,000 of its members staged a digital sit-in, joining a Facebook group created by MoveOn.org called "Facebook: stop invading my privacy!"

Beacon monitors users' purchasing activities and then uses certain information in targeted advertisements. Unfortunately, more than a few Facebookers were finding they had inadvertently revealed their retail habits to friends after missing prompts to opt out of the process, reports Anick Jesdanun of Associated Press.
Now, users must actively agree for this information to be used – an embarrassing retreat for a company that so recently claimed to have discovered online advertising's rivers of gold.

But could this be exactly what Facebook needed to do? asks Scott Morrison on MarketWatch.

Advertisers and industry analysts believe this may prove to be the "key tactical shift” that makes consumers and marketers more comfortable with Facebook's innovative, yet intrusive, advertising system.

Social networks have to strike a delicate balance between capitalising on their huge databases of consumer information and alienating users.

And Facebook's predicament is particularly acute, says Morrison, because it is also struggling to justify its rich $US15 billion valuation, set when Microsoft took a 1.6 per cent stake for $US240 million.

The valuation is tied to great expectations of Facebook's ability to generate advertising revenue, and its Beacon system is a key part of its strategy to tap into the network's rich reserves of 57 million active users.

The Beacon system was designed to track Facebook users when they visit partner sites and automatically tell Facebook friends what those people were doing and buying on these sites.

Such notices are advertising messages unto themselves, says Morrison, and marketers also can buy ads that are embedded in those "news feeds."

So, while Facebook's changes last week will mean fewer people will transmit their user activity via Beacon, providing fewer marketing opportunities, they would also make the social network more attractive as a marketing platform.

"Privacy is paramount. You can't do business online if people don't think their information is secure," says Judd Bagley, a spokesman for online retailer Overstock.com, which pulled out of Beacon a week ago after customers complained that their friends were able to see what they purchased.

Blockbuster spokeswoman Karen Raskopf also approves of Facebook's decision to improve privacy controls. "We think that any changes Facebook makes that can make it even more obvious to users what news they're sharing and what news they're not is a positive," she said.

The next step is to find ways to encourage Facebook users to opt in.

Meanwhile, industry analysts are quick to point out that Facebook's retreat doesn't guarantee it will succeed in its bid to make money from social network advertising.

"Can (Internet) proprietors effectively commercialise word-of-mouth? That's an open question," says Andrew Frank, analyst at research group Gartner.

Emily Riley, analyst at Jupiter Research, agrees, noting that Facebook's tactical shift does little to address the larger questions surrounding its advertising initiative.

"We have yet to see a large social network command a large portion of its revenues from big brand advertisers," she says. "This is an experiment."

Facebook retreat shows ad-targeting risk, Anick Jesdanun, Associated Press

Marketers laud Facebook's retreat on privacy controls, Scott Morrison, MarketWatch