LONDON/PARIS – While traditional advertising groups jostled for awards at a recent annual industry gathering in Cannes, the year's biggest star was a newcomer to the beaches: the social network Facebook.
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The company has gone from nowhere a few years ago to become the biggest single seller of online display advertising in the United States with more than $2 billion in revenues this year, according to research firm eMarketer.
Online ad sales have boomed in recent years largely because they finely target consumers in a way that print media and TV cannot match. Google and Amazon initially pioneered the trend by analysing web surfing and internet searches to target customers' tastes.
Now Facebook has brought a new level of sophistication to the game: mining data from its social network about users' likes and dislikes as well as those of friends to better target ads.
The 'social ad' approach can be seen in a current Facebook campaign run by tennis racket maker Head. Users who link to Andy Murray's page get updates from the player himself mixed in with ads for his sponsor and jokey Youtube videos.
However there are risks involved for Facebook and other online ad players as they develop ever more sophisticated ways to track people's behaviour online.
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Some regulators see such tracking as a violation of privacy even when it is done anonymously. The Europe Union recently required that web surfers be notified if the sites they visit are collecting information about them, prompting howls from industry.
The stakes are high: industry insiders and analysts say brands are willing to pay more for such 'social ads' than they would for traditional online ads since they see them as more effective.
"Brands are willing to invest to learn how consumers interact with their brand," said Mykim Chikli from Performics, a division of Publicis, which helps big companies with online advertising placement and strategy.
"You can target people who like golf, cars, and watches and you can start to push ads to that profile of person."
In a demonstration of Facebook's current advertising power, Google recently launched a social network dubbed Google+ in its boldest attempt yet to crack the medium and tap the advertising dollars it brings. [ID: nN1E75R1FO]
The move toward social ads shows how the Internet is transforming the whole industry.
Major companies from Nestle to Ford are increasing the proportion of their ad spend on the Internet to the detriment of traditional press ads and big ad agencies are scrambling to evolve.
The changes have given birth to a slew of tech start-ups trying to come up with more sophisticated ways to match ads to consumers, often with sophisticated data mining techniques and algorithms.
Among them is RadiumOne, a venture-backed start-up that tracks people's social behaviour on-line by partnering with niche social networks, blogs, and media-sharing sites and then uses that data to target ads.
"When you share an article or email a Web link to a friend, that's a very influential connection and we can track that through cookies and then segment users into groups," Chief Executive Gurbaksh Chahal told Reuters.
"Social data is immense," he said. "We've built some great technology that can understand data and find an audience in the real time and serve an ad that's relevant to them."
Martin Sorrell, the CEO of the world's biggest ad group WPP , says there is room to improve the effectiveness of web ads: "Online advertising is more sophisticated than offline, but it's not got to where we think it can go yet."
Facebook's influence is also spreading beyond its own site as more webpages allow people to use their login details from Facebook to enter instead of a separate password.
Users can then share content and post messages within those sites as they would do on their social network, which in turn allows the website to access their profile and determine the user's likes and dislikes. Twitter has a similar system.
California-based start-up Gigya powers the buttons that allow such sharing for about 5,000 sites, such as US broadcaster ABC and sports apparel maker Nike.
"Someone like Nike is getting access to that extremely rich data that it wouldn't have been able to access otherwise," Gigya Chief Executive Patrick Salyer said in an interview.
Beyond more sophisticated targeting, Facebook also serves to amplify traditional word of mouth on everything from new movies to the latest smartphone.
"If I have a good experience with a brand I'll tell a person offline -- I might tell my friend -- but if I do it on Facebook the average person is telling 130 people," said Facebook Chief Operating Officer Sheryl Sandberg.
"We think that explains the very healthy growth of our advertising business."
(Editing by Chris Wickham and Sophie Walker)