Facebook: Ad Revenue Not the Top Priority

Facebook isn't distracted by the fact that the advertising industry is facing an across-the-board downturn.

The popular social network is launching a new ad format, called "engagement ads," because they ask Facebook members to respond to ads that pop up right after they log in, by commenting on a movie trailer or the like, and then sharing that response with the user's Facebook friends.

These ads are effectively getting Facebook users to generate content about a marketer's product or brand, which Facebook then disseminates throughout friend networks. The company began testing the format in August and will offer it to all its advertisers this month.

Facebook's CEO Mark Zuckerberg told me this summer that ad revenues are not the top priority but that growing membership is. However, the company is clearly trying to get its advertising clout to match its already huge and loyal membership. And to catch up with its big competitor, MySpace. Facebook has 1.1 percent of the total U.S. display ad views, while News Corp's (NWS) Fox Interactive, which includes MySpace, has 15.9 percent of display ad spending, according to comScore.

This new ad format comes at a tenuous time for the online advertising space. Online ad growth is expected to slow to 14.5 percent in 2009, from 17 percent in 2008. While some online ads offer a measurable click-to-buy or click for more information model, there's no way to measure the efficacy of certain other online ads, especially those that are trying to impress a brand message. And will these new ads distract and annoy loyal Facebook users?

With a valuation of some $15 billion based on Microsoft's (MSFT) investment in the company, the question is, what does this economy mean for Facebook's value and its prospects. Last week at a conference Zuckerberg said the company didn't need to raise any more money, reiterating previous comments that there are no plans to go public for another few years. But the company does seem to be buckling down when it comes to forging relationships with advertising agencies to spread the word about its offerings and to find an ad format that's well tailored to its site.