Facebook (NASDAQ:FB) looks quite different from the simplistic, ad-free interface that everyone fell in love with the first time they logged on. As Facebook has continued to evolve and grow, its focus keeps returning to what matters most: money. The way Facebook makes the bulk of its cash is through advertisements, of which they offer several different types. Facebook is constantly trying to change the game in online advertising, and the company's pockets will continue to swell as a result.
The latest and most invasive kinds of advertisements that Facebook is offering are called "Facebook Exchange Advertisements." Facebook Exchange Advertisements, or FBX (Facebook Exchange) for short, are a fairly new breed of ads. FBX checks the user's cookies, looking through the websites and products that you looked through recently. The data is highly specific, capable of knowing exactly when you looked at a certain product.
Let's say, for example, that you spend several hours browsing a clothing retailer's online store. You may not have bought anything, but with every click you generated additional data about yourself and your spending habits. Let's assume you liked a certain coat, but found the price to be too high. Facebook will know that you spent X amount of time looking at the item, and the algorithm will display the item, or items similar to it, when you log on to Facebook.
While this may sound a little frightening in terms of privacy, fear not. Facebook is not out to kill you a la Skynet. Facebook is just out to make a buck. With its latest iteration of online advertisements, they have developed promising technology that could become immensely profitable.
Facebook's initial testing of FBX yielded impressive results. Facebook allowed several data firms to publish information about the effectiveness of the ads back in Q4 2012, and all of them were positive. Advertising analytics company AdRoll showed that the ROI for the ads was 1600%. Another analytics firm called Triggit compared FBX to traditional online advertising platforms, and noted drastically improved marketing: a 4 times higher click-through rate, a 2.5 times higher post-click conversion rate, and an astounding 650% decrease in cost per click through order.
Facebook Exchange could do very well for Facebook's bottom line. Since the company makes ~85% of its money from advertising, a revamp to their advertising capabilities will obviously increase profitability. There are several competitors that offer similar services, such as Google's (NASDAQ:GOOG) AdX. So far none of them perform as well as Facebook Exchange, due to the large amount of time that people spend looking at their Facebook pages.
The numbers are there. FBX ads sell products, and they do so with an astounding amount of efficiency. Facebook has since decided to fully implement FBX, and just announced that the ads are deployed within its revamped news feed.
FBX is another powerful weapon in Facebook's advertising arsenal. The concept is proven and should do well when it is fully employed, allowing Facebook to better monetize its advertisements. The rewards, of course, will be passed down to us shareholders.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.