Facebook Exchange explained: A billion new targets for real-time bidding

By: Jasper Jackson  Published: October 4, 2012

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Facebook is huge – today it announced it had racked up more than one billion active members. 

That membership is one of the main reasons why Facebook is also huge in online display ads – during 2011 Facebook served one quarter of all display ads in the US, delivering 1.3 trillion ad impressions according to comScore

But last month the social network added an entirely new element to its ad-funded business model by launching its Facebook Exchange to the world. What does this mean to the wider media economy and why should we care?

Facebook Exchange opens up Facebook to the world of real-time-bidding, the rapidly growing advertising technology which allows marketers to purchase targeted ads across a wide network of inventory through an automated system using demand side platforms (DSPs).

It's something the likes of Google , Rubicon and Microsoft have put a lot of effort into in recent years, but Facebook's entry into the market massively increases the amount of inventory available.

Facebook hasn't released an official list of the DSPs it is working with – though Google's DoubleClick has notably been excluded – but two that are active in the UK, MediaMath and Turn have made their participation public.

MediaMath VP of business operations for EMEA Greg Williams told TheMediaBriefing: "The opportunity across RTB is huge. In the UK alone, last month we saw 38 billion opportunities to bid (for ad space). Before the launch of Exchange, you could only run Facebook ads via their console.

"But now, now they have provided a way for buyers to bid on their inventory in these automated markets. You are looking at something that allows everyone to get access in the marketplace."

Facebook Exchange does more than just free up a huge amount of new inventory inventory for real-time bidding. For the first time, marketers can now target Facebook users based on information collected from their activity on the rest of the web.

When a web user visits a website, say a fishing tackle shop, the website puts a cookie on the user's computer which can tell advertisers all sorts of information, such as products they have looked at, which matches up to a cookie given to a demand side platform.

When a user visits Facebook, the social network notifies the DSP which can then bid for space to serve ads to that user based on which products they have shown an interest in. The DSP will be able to target Facebook visitors based on a huge amount of anonymised web activity data, and offer its clients detailed profiles of who their ads will be seen by.

This process doesn't include Facebook's own profiling data – the kind of thing that makes regular Facebook ads work (or not, depending on your view).

Williams says that the combination of using targeted information from outside Facebook, good ad placement – in the top right corner of Facebook.com – and the length of time spent on the site – an average of 6.5 hours a month in the US – makes for a powerful proposition.

Three DSPs involved in the Facebook exchange trials which began in June have reported conversion rates between four and 16 times higher than normal. Williams says MediaMath has seen an average improvement in cost per action (CPA) of 40 percent and one client saw a 700 per cent improvement.

Williams also says that the spend on Facebook Exchange is coming from display ad budgets, and isn't reducing the the amount spent from social media budgets used to target Facebook users based on their user profiles.

Display ads not social media ads

One of the key advantages of Facebook Exchange is the increase in measurable return on investment for MediaMath and other partners – including, therefore publishers.

However, Facebook certainly hasn't given up on the more brand-centric ads it has been serving to users based on their social networking profile. But in the light of big brands like General Motors pulling out of Facebook ads because of poor performance, Mark Zuckerberg's lieutenants are also keen to point out that it's not all about clicks.

Facebook has teamed up with audience targeting firm Datalogix to track 50 ad campaigns and measure the impact of Facebook brand advertising on physical in-store purchases. Facebook claims that in the Datalogix campaigns 99 per cent of sales came from people who saw Facebook ads but did not click on them. That prompted Facebook head of measurement and insights Brad Smallwood to lament the fact "we ended up in this world where the click is king". He claims ad impressions matter more than clicks. Still, that doesn't solve the problem of measuring the impact of ads that never receive a click.

Anyone feel uneasy about all this? You're not alone: although Facebook insists all the data in the Datalogix trials were anonymised, it has still attracted  the inevitable criticism from privacy groups. For a measured assessment of the implications of the data shared between Facebook and Datalogix, take a look at this by the Electronic Frontier Foundation.

If you are still keen to find more about the impact of real-time bidding, our own Patrick Smith interviewed MediaMath co-founder Erich Wasserman, the video for which is below.