Facebook Courts Madison Avenue Ahead of Its IPO

About a year ago, when it became clear that taking Facebook Inc public was a matter of when not if, Chief Operating Officer Sheryl Sandberg went out and poached Caroline Everson, then global advertising head at Microsoft Corp (MSFT.O).

Landing an executive with Everson's pedigree was a coup - prior to Microsoft, she was a top advertising executive at Viacom Inc's (VIAB.O) MTV Networks and at Walt Disney Co (DIS.N). The hire also sent a clear message to Madison Avenue from the world's largest online social network: We want to work with you.

Until Everson's arrival as vice president of global marketing, Facebook's relationship with the advertising community was at best politely dismissive, at worst outright antagonistic.

Chief Executive Mark Zuckerberg has said he views Facebook more as a way to connect people than a business, and he has been adamant about limiting the impact of ads on user experiences. Indeed, his reluctance to flood the social network with ads is widely viewed as one reason why Facebook endured while an earlier rival, MySpace, expired.

Mark has an evangelical approach to advertising, said Martin Sorrell, chief executive of WPP Plc (WPP.L), the world's largest advertising agency. He sees Facebook as a vehicle to open up communication, not to monetize.

But with 85 percent of its revenue derived from advertising last year - when revenue was $3.71 billion, Facebook realized it needed to strike a more cooperative tone with Madison Avenue ahead of its initial public offering and the accompanying intense scrutiny on profit growth.

Advertising sources identified Everson, along with David Fischer, vice president of business and marketing partnerships, and Blake Chandlee, vice president of global agency relations, as the triumvirate leading Facebook's charm offensive.

It's been remarkably different over the last 12 months, Michael Hayes, president of digital at advertising firm Initiative, said of Facebook's attitude toward the advertising community.

They didn't really have a relationship with us before, but now they are trying to establish a relationship. I've definitely seen an uptick in their interest in working with us, he said.

Last September, Facebook set up a committee consisting of executives from brands that advertise on the site, as well as representatives from many top ad agencies, to regularly provide feedback on its advertising products and services.

The company also commissioned Hayes' firm, Initiative, to compare the success of Facebook ads against other media, such as television, the first time it asked for such a study.

Sorrell said Facebook plans to introduce new advertising products by the end of February. A source familiar with the announcement said it would center on new products around mobile advertising, but did not provide further details.

A Facebook representative declined to comment on any new product announcements or to make Everson available for an interview, citing the quiet period ahead of the IPO.

ADVERTISING, FRIEND OR ENEMY?

Facebook, which boasts 845 million users worldwide, is more dependent on ad sales than CBS Corp (CBS.N), the most ad-dependent traditional media company, which derives two-thirds of its revenue from advertising.

Facebook ranks as the top provider of graphical online display ads in the United States, accounting for roughly 28 percent of the total impressions of such ads last year, according to industry research firm comScore.

But analysts say the price that Facebook charges for the bulk of its ads is lower than those of other forms of online ads, such as the branding campaigns popular on sites such as Yahoo (YHOO.O) or the search ads offered by Google (GOOG.O).

Facebook is taking steps to make its ads more valuable to marketers by integrating social networking features with sponsored stories or ads that highlight a user's friends who have liked a certain product.

The big question is whether Facebook can further evolve its advertising offerings, which are tempered by privacy laws and the changing parameters around how social networks can mine user data for targeted marketing.

Their ad product opportunities aren't too robust right now, and the effectiveness is spotty at best, Hayes said.

Facebook has come under criticism for the way it has used member data in the past, including in 2008 when its Beacon advertising product was assailed for disclosing such things as what purchases people were making on Amazon.com (AMZN.O) to their friends without permission.

Companies have also removed ads from being displayed against offending user or group profiles, not unlike how brands pull commercials on television shows in protest.

Facebook listed the evolving nature of privacy and data protection laws as two risk factors that could impinge future growth in a regulatory filing.

Still, the key for Facebook, according to David Eastman, president of digital at JWT, which is part of the WPP group, is keeping Wall Street at bay while it figures out how to monetize its role as an identity broker.

I'm worried about how the IPO will affect creative, said Eastman. I'm worried that the demand for growth and making numbers will get in the way of really evolving the platform to figure out how to monetize influence.

EVERSON AT BAT

If Everson and her team can establish that equilibrium, the opportunities for Facebook are enormous.

Internet advertising is expected to grow at an annual average rate of 15.9 percent to $113 billion in 2014, from an estimated $84.2 billion this year, according to Zenith Optimedia. That makes the Internet the second-largest ad market behind TV, which by 2014 will reach $215.7 billion.

Facebook currently commands only a sliver of agency ad dollars. In 2011, Sorrell said WPP spent $1.6 billion with Google and just $200 million with Facebook. This year Sorrell, who labeled Google a frenemy in 2006, expects to spend $2.3 billion with the search giant and $400 million with Facebook.

Sorrell said the disparity is because of the greater difficulty of monetizing social media. Not to mention that the increased competition with Google in recent years has made it a friendlier frenemy, Sorrell added with a laugh.

Facebook is a superb branding medium, but right now it is more about PR than advertising, he said.

In June, Google launched its own social network, Google+, to compete with Facebook. The service, which does not currently display any advertising, has won praise for innovative features such as group-video-chat technology and a design that allows users to easily sort friends into different groups.

Sorrell said the two services are preparing for a battle royal to win the future of social advertising.

There's a real battle shaping up and the competition is intense, he said, adding that from the advertising community's perspective more options are better than less.

Everson, who left Microsoft after nine months, is on the front lines of that battle for Facebook.

A New Jersey native, Everson graduated in 1999 with an MBA from Harvard. She was pegged as a Woman to Watch by trade publication Advertising Age last May, where her profile noted that she got married in Disney World and had Wyclef Jean rap a song about her twin daughters.

Since she's joined, Facebook has definitely turned up the heat on getting cozy with agencies, said JWT's Eastman. There are lots more opportunities to get closer and more involved with them.