James Yancey, VP of Global Strategy at IgnitionOne, on the future of Facebook Sponsored Stories combining social graph and third-party data.

What would happen if Facebook partnered with third-party data providers? Warning: if you’re a privacy fanatic, then it will probably stress you out to read any further. For those with an open mind, hear me out. If you take 900 million active users and understand not just how many friends they have, but how valuable those are based on their interests, demo data and influence – what are the possibilities?

In the months anticipating the Facebook IPO, the news had been calling for more ads that show clear direct performance, like search or display. And finally Facebook has been delivering one ad unit that shows comparable promise, the Sponsored Story. It's a simple idea: show a socially relevant ad unit to friends only in the format and context of other updates in the news feed.

The success of the Sponsored Story is based on an idea that Facebook calls “amplification”. The thought behind amplification is that the original ad can reach many people at scale if their friend’s “like” it and it shows up in their subsequent news feeds. But again, it’s tied to reach metrics. Direct response advertisers have lost their interest and patience in many cases when comparing it to things to which they are accustomed.

All ad units that show up on mobile devices are in the news feed, however it still must be remembered that despite these efforts you still cannot tailor exactly who is going to see those ads. If you create a Sponsored Story it only shows up on the feeds of the Facebook friends of the people who have interacted with the post. For instance, on my news feed, Sue sees that Bob commented on a post by Brand X. The same message appears on Sue’s mobile, but there is no control over to which friends it can or cannot be shown as currently there is no targeting. Third-party data would allow marketers to automate the targeting of ads based on the information available, such as displaying certain behaviour or preference in the past, and paying appropriately.

The Mobile Advantage

Strategically, the most recently noted aspect of these ads is their success on mobile devices. Although Facebook had previously downplayed the importance of mobile, Mark Zuckerberg himself has now stated that Facebook will be a mobile company in two-years time. That’s no small task, no matter how much cash you have in hand. The recent acquisition of Instagram was one step in that direction.

Enter Facebook Mobile Sponsored Stories. This ad unit boasts a whopping 1200% increase in CTR compared to other Facebook ads and earns 11.2 times as much money per impression, compared to Facebook’s desktop ads. These are significant signs that directionally they are onto something like the keyword-based text ad for search.

As the only Facebook advertising available on mobile devices, there is much satisfaction in the fact that mobile Sponsored Stories have a CTR that is finally rivalling other channels like display and search. Additionally, Facebook states that 50% of all its users access Facebook via mobile. This represents a major opportunity for a mainstream channel that knows your location, yours interests and your influence. All it’s missing is allowing this to be combined with other third-party data which companies have so feverishly collected -- and they just have with the new Facebook Ad Exchange.

It’s great to know that Joe likes pizza, but it’s better for advertisers to know that he is in the market for a new home, car or job. Profiles and status updates rarely convey this with accuracy, but by extending real-time bidding to Facebook we can now potentially know just that, and allow it determine how much I am willing to pay for a display impression on standard Marketplace ads. This is nothing that Facebook technically does, however it’s something that they allow in that they are passing the cookie IDs to be matched against other data that has been collected. Yet this wouldn’t apply to Sponsored Stories due to the fact that there is no auction involved. For example, only the brand would pay to advertise that someone likes their brand.

Amplifying Reach

Now let’s take this all further. What if Facebook partnered with third-party data providers and they could understand not simply your amplification, as in how many friends you could reach, but also how valuable those people were to an advertiser. It goes like this: your company sells credit cards, you actually have great content and a strong community around your Facebook Brand Page. I am a customer and I “like” your brand page. Today, as the credit card company, you can decide to allocate media budget behind my “like”, making it a Sponsored Story that will be shown to all of my friends in the news feed. If you don't allocate budget to turn it into an ad, then 10-20% of the audience is likely to have it show up in their feed organically. So, a marketer today makes that decision based on reach. Now imagine a future reality where it’s not based solely on my reach, but the value of the people I can reach to the advertiser whose page I just “liked”. Facebook would know the third-party data on each and every friend that I have, giving a clear likelihood as to whether they would be likely to apply or get approved for that credit card.

Suddenly, similarly to how RTB performs on display ads, an advertiser could decide how many of my friends they were willing to pay for a Sponsored Story ad to be shown to or not. Potentially this amount could differ anonymously
on a friend by friend basis. The key difference is that they wouldn’t be bidding against other advertisers, because they are liking my brand. It’s merely a matter of how much I’m willing to pay. Facebook would hold the associated values that a person’s friends would represent. It would be a good filter for the user so as to not show me likes for brands in which I have no interest. Facebook suddenly has a way to monetise Sponsored Stories in a much more enriched way, at scale.

Bringing this back to mobile, currently the only ads that can get into the news feed are exclusively Sponsored Stories. Now take our dynamic pricing model using third-party data and suppose that as an advertiser, gauging the value of a Sponsored Story, you could determine not only how valuable my friends are but how close they are to brick and mortar locations. It would make the ultimate mobile ad unit.

Of course it still must be remembered that one of the main elements in producing a successful Sponsored Story is to create good organic content. I use the example of a “like” here for simplicity, but of course there is a much deeper strategy on how brands need to create compelling content to make all of Joe’s friends want to click on that Sponsored Story. I can see a massive shift in focus of advertisers energy and effort to content creation, if they could have a more clear case for the value of these ads.

Maximising Relevance

To sum it all up, Facebook has huge potential to partner with third-party data providers in order to more clearly value the content and “likes” of user-generated Sponsored Stories. The incentive for the advertiser and Facebook is aligned: only showing ad units that are most relevant to the user that are likely to be of value and interest.

Facebook already knows the social reach of a user’s friends and their interests. In the future, if there is a permissible and legal way for Facebook to leverage anonymous user-level data around social influence and interests, this could be a powerful new way to extend auction fundamentals to socially contextual and mobile ads.

We are seeing a shift in focus to the extended social value that an individual can deliver. Historically, value has been attributed to the channel (TV, radio, online) in getting ads and messages out to consumers. Today, we are seeing new metrics and measurement shift from the channel to the individual using multiple data sources. In the near future, I think we’ll see more examples of the individual’s influence over a network hold importance more so than the channel, in many ways.

Today’s advertising industry is demanding a 1-to-1 direct response on Facebook. We know its IPO valuation is not related to its ability to generate revenue today, it’s based on what the company can do to extend the social reach at a lower cost in the future with the advancement of new social tools and mobile technologies. When people think about what Facebook can offer in the future, all the possibilities around combining third-party and social-graph data have to be considered. In a world where the value of your friends may be greater than yourself as an individual consumer, maybe having 5,000 “friends” wouldn’t seem so impersonal?