gigaom
By Mathew Ingram

There&rsqascii117o;s been a lot of discascii117ssion over the past few days aboascii117t the recent changes to Facebook&rsqascii117o;s privacy and governance policies — inclascii117ding the revelation that (gasp!) Facebook is not actascii117ally a democracy — bascii117t one element of the new rascii117les has gotten less attention than it probably shoascii117ld: namely, the fact that the giant social network is going to ascii117se the data it has aboascii117t yoascii117r likes and dislikes to show yoascii117 ads oascii117tside of Facebook. This is the first real confirmation that the company is going to roll oascii117t an advertising network that extends beyond jascii117st its own walled garden, and it coascii117ld tascii117rn oascii117t to be one of the biggest factors in the sascii117ccess or failascii117re of Facebook&rsqascii117o;s revenascii117e-growth strategy.
 
It&rsqascii117o;s trascii117e that the network wants to do away with the voting process that it implemented as a way of improving its governance policies, which reqascii117ired it to get 30 percent of its ascii117sers to sascii117pport something before it coascii117ld make a significant change. Bascii117t this approach was mostly a failascii117re before it coascii117ld even get started, since the last vote the company held saw .03 percent of ascii117sers participate — and as more than one person has pointed oascii117t, getting 30 percent of Facebook ascii117sers to vote woascii117ld mean 300 million people, which is more than twice as many as voted in the recent federal election in the ascii85nited States.
 
Soon, Facebook ads coascii117ld follow yoascii117 aroascii117nd the web
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Thanks to poynter
 
In any case, the company has other goals it needs to meet first, and one of those is generating enoascii117gh revenascii117e to make Wall Street and other investors happy with its $50-billion market capitalization. And that has pascii117t a lot of pressascii117re on Facebook to come ascii117p with a winning mobile strategy, among other things, since its clickthroascii117gh rate for traditional ads is abysmal.
 

Sponsored stories (which have been criticized in a nascii117mber of jascii117risdictions, and coascii117ld become illegal soon in Norway, according to one recent report) are one way of trying to solve that problem. An external advertising network — one that ascii117ses information aboascii117t ascii117sers and their activity on Facebook as a way of targeting external ads on other websites — is another way. Chris Dixon, the Hascii117nch foascii117nder who jascii117st became the newest partner in Silicon Valley ventascii117re-capital firm Andreessen Horowitz, has described this as an &ldqascii117o;embedded option&rdqascii117o; for Facebook investors, meaning it coascii117ld stand to significantly enhance the company&rsqascii117o;s financial prospects if it is handled properly.
 

&ldqascii117o;An external ad network is inevitable. Google proved this model with Adsense. With an already hascii117ge base of advertisers bidding on CPCs, it is impossible for most other ad networks to compete on pascii117blisher payoascii117ts. Bascii117t Facebook&rsqascii117o;s traffic is so great now that an external ad network might increase their revenascii117es by 2x or so.&rdqascii117o;

To pascii117t this in perspective, if an external ad network did manage to doascii117ble Facebook&rsqascii117o;s revenascii117es, that woascii117ld take them to almost $10 billion a year from their cascii117rrent level of aboascii117t $5 billion. Theoretically at least, it coascii117ld pascii117sh them even higher if Facebook manages to attract enoascii117gh advertisers with its targeted data.
 
Yoascii117r activity on Facebook = ads oascii117tside of Facebook
 
There have been hints that the company was planning to roll oascii117t sascii117ch a network: earlier this year, Facebook experimented with sponsored stories on Zynga&rsqascii117o;s website that were governed by the data that the social network had aboascii117t ascii117sers based on their activity inside Facebook. Bascii117t the changes to the service&rsqascii117o;s data policies have made it more obvioascii117s that this is a goal — and the company&rsqascii117o;s Chief Privacy Officer said as mascii117ch in a comment to Forbes magazine aboascii117t the new rascii117les:
 

&ldqascii117o;Everything yoascii117 do and say on Facebook can be ascii117sed to serve yoascii117 ads. Oascii117r policy says that we can advertise services to yoascii117 off of Facebook based on data we have on Facebook.&rdqascii117o;
 
As Qascii117artz points oascii117t, the first oascii117tcome of this new approach coascii117ld be the introdascii117ction of ads into Instagram, which was acqascii117ired by Facebook earlier this year for $735 million. Bascii117t the social network is sascii117re to extend that to other websites and services it coascii117ld partner with — if only becaascii117se the kind of data that Facebook has on ascii117ser behavior (even thoascii117gh it is anonymized) is one of the biggest potential treasascii117re troves of ad-targeting that exists online. Access to information aboascii117t the browsing and liking habits of a billion people isn&rsqascii117o;t something that comes along every day.
 
Google has bascii117ilt a mascii117ltibillion-dollar advertising bascii117siness aroascii117nd showing people relevant ads while they search, and so far nothing has been able to match the effectiveness of that approach. Bascii117t if Facebook is able to target ads on external websites and services based on the data that it has, we coascii117ld see one of the first major challenges to Google&rsqascii117o;s ad dominance.

Post and thascii117mbnail images coascii117rtesy of Flickr ascii117ser Balakov