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Facebook's strategy: More than ads

The social networking site promises to turn advertising on its head by blending e-commerce with word-of-mouth marketing, writes Fortune's David Kirkpatrick.

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By David Kirkpatrick, Fortune senior editor

(Fortune) -- Don't compare Facebook's new ad system to anything you've seen on Google, television, or any other advertising medium you can think of.

Compare it instead to Amazon.com (Charts, Fortune 500) or eBay (Charts, Fortune 500). That's because, while advertising as we know it today may very well be a good profit engine for the social networking company, its new Facebook Ads program is also about e-commerce -- that is, selling.

Take the user reviews on Amazon. They're often useful when making a purchase, yet we don't know much, if anything, about the people recommending a product. Facebook aims to fix this by adding what it calls its "social graph" on top of such a rating system. In effect, your friends -- not strangers -- will be giving you the thumbs up or down on products you might buy. (For an excellent description of the mechanics and details of what Facebook announced Tuesday, read my colleague Jessi Hempel's report from the scene.)

Facebook's strategy is based on a relatively new concept known as word-of-mouth marketing. In recent years, a sizable industry has grown up around the idea of getting people to talk to other people about products and services while hanging out together at neighborhood barbecues or late-night dance clubs. Consumers, the thinking goes, are far more likely to trust a pitch from friends than from a 30-second TV spot.

It makes sense. And now Facebook is automating that process -- combining e-commerce with word-of-mouth marketing. When a Facebook user buys something, the seller will ask for permission to promote that fact to his or her social network (and, presumably, pay Facebook a fee if the user agrees). The contrast with conventional advertising is stark. It's more akin to an Amazon seller who pays a per-sale commission than an advertiser who pays for a click on Google (Charts, Fortune 500).

It's yet another sign of how power is shifting online into the hands of consumers. I wouldn't be surprised if retailers offer discounts to Facebook users who agree to promote their shopping habits.

But the Facebook strategy is also about promoting brands. It allows people to stand up and say they believe in a certain product. For instance, this week I indicated I am a "fan" of The New York Times. Facebook will now broadcast that fact into the "Newsfeed" that my friends see as they log into the service -- and The New York Times benefits.

To be sure, Facebook's chief competitor, MySpace, has long allowed members to befriend bands or brands. The difference is that Facebook distinguishes between advertisers and users. On MySpace, you make friends with a brand much as you would with, say, a new coworker. Facebook makes a distinction between friendship with a person and "fanship" with a brand.

What makes Facebook different from MySpace and most other social networks is its social graph, which expresses real offline relationships in electronic form. To now attempt to inject commercial information into that social graph -- and to do so without disturbing the human relationships that have allowed Facebook to thrive -- is fascinating, ambitious, and highly risky.

The strategy isn't foolproof. Skeptics argue that people have little interest in becoming public promoters of products they use. Facebook probably didn't help its cause much when, in announcing the new ad platform, it cited Sprite as an example of a product users could promote to their pals. Will people really want to trumpet their association with unhealthy sugar water? Most likely not (unless, of course, they're paid for it).

But what about that cool independent coffee shop around the corner? That sounds much more appealing. So it's also possible that Facebook will expand the universe of companies that advertise online.

What's more, Facebook could help change the very nature of marketing, forcing marketers to work more closely with product developers. Instead of crafting compelling messages that will encourage consumers to want to spend, companies will have to think about how they can make the best possible product that people will want to buy -- and tell their friends about. Cruddy goods won't have many friends on Facebook.

Whether Facebook's new ad play sizzles or fizzles, the site continues to make the boldest moves on the Internet. To top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.