Facebook Is Closing the Ad Revenue Gap with the Portals

There were three big news stories last week in the social network business: AOL sold Bebo for a reported $10 million to an investment group; MySpace co-president Jason Hirschhorn left the company to return to New York; and Reuters reported that Facebook generated revenue of $700 million to $800 million in 2009—a higher figure than had previously been estimated.

The timing of the Facebook news—appearing in the same week that two of its competitors had negative news—surely wasn’t an accident. I’ve been hearing whispers about Facebook’s strong ad sales performance, particularly its self-serve product, in the past few months. I think this slightly more public statement about its revenues (which was attributed to “two sources familiar with the situation”) is a sign that Facebook is getting closer to filing for an initial public offering.

It also means that Facebook is asserting itself not only as a social-networking giant but also as a real rival to Google, Yahoo! and Microsoft. In May, Facebook was the number 4 property on the Web, according to comScore. It reached 130.3 million unique visitors in the US, trailing only Microsoft (160.1 million), Yahoo! (167.2 million) and Google (179.2 million).

In December 2009, I projected total social network ad spending would reach $1.3 billion in the US this year, up 7.1% over 2009. I am starting work on a revision to that forecast, and Facebook’s strong performance will be a key component.

Thus far, Facebook has significantly trailed its portal rivals in ad revenue. My eMarketer colleague David Hallerman forecasts that Google will have net US advertising revenues of $9.55 billion this year, Yahoo! will garner $3 billion in the US and Microsoft will net $1.2 billion. The figures all exclude traffic acquisition costs, or fees paid to partners to send traffic back to the portals.

Back in December I predicted marketers would spend $450 million on Facebook advertising in the US and $155 million outside the US, for a total of $605 million worldwide.

Since last December, it has become apparent that Facebook’s self-serve ad product has performed much better than I expected. USA Today reported last week that self-serve ads brought in $300 to $400 million in revenue in 2009. The self-serve system allows advertisers to create small ads that appear on the right-hand side of Facebook pages and then target the ads to segments of the Facebook audience. Facebook’s other revenue streams are branded ads (sold by its in-house sales team), virtual gifts and virtual currency. The latter is only now starting to be rolled out.

Media reports have estimated Facebook’s total revenue at anywhere between $1 billion and $2 billion this year. In an interview with Inside Facebook this week, Facebook CEO Mark Zuckerberg said “the [revenue] estimates are not so far off in either direction that it’s causing us any pain.” Facebook currently derives the majority of its revenue from advertising, but some reports have said that virtual currency could bring in significant new funds. The terms of Facebook Credits mean that it gets a 30% cut of any transactions done using Credits.

I’m several weeks away from publishing our own revised social network ad spending forecast, but I believe this will be the year that Facebook will start to close the revenue gap between it and its larger competitors. It has already passed AOL in US traffic, according to comScore, and it is not out of the realm of possibility that it could pass AOL’s $890 million in net US advertising revenue.

Image courtesy of Facebook.