How Does Facebook Generate Ad Revenue?

How does a free website like Facebook get valued at close to $100 billion? Melissa Block talks with Wired magazine senior writer Steven Levy about how Facebook uses your personal information to generate targeted advertisements and huge revenues.

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MELISSA BLOCK, HOST:

So just how does 800 million Facebook users' personal data translate into what could be $100 billion in value? We're going to click through that matrix now with Steven Levy. He's a senior writer at Wired magazine. Hi, Steven.

STEVEN LEVY: Hi.

BLOCK: I am logged onto Facebook right now. And why don't we say that I go ahead and launch a Scrabble game, which I'm known to do. Where does the fact that I've done that go? Who uses that?

LEVY: Well, everything you do on Facebook is logged and stored, and all that information is fair game to help Facebook select ads that you're going to see, and advertisers can use that information to target their Facebook ads to you. And then there's other kinds of ads that actually appear in that little news feed in the middle of the page that have your friends' recommendations on it.

BLOCK: Now, Steven, you said a couple of things. One is that Facebook selects an ad and sends it my way, and the other idea would be, though, that advertisers themselves get this information. Which of those is it, or is it both? Is Facebook selling my information to advertisers or keeping the information then steering ads to me that it thinks I'll like?

LEVY: Facebook doesn't turn the information over to the advertisers. Facebook keeps that information for itself and then will, you know, use that information when an advertiser says they want to reach a certain audience. A classic example is people put their relationship status on Facebook. So if someone is engaged, Facebook knows, hey, here's a woman in Nashville, Tennessee, who's engaged, there might be a bridal shop which has said we want to see those people, and then that ad would appear instantly.

BLOCK: And would advertisers be specifically telling Facebook here is exactly whom we want you to target. We want - maybe not in that case but in something more general. It's - maybe it's a kitchen supply store. We want people who are within a certain age group. We want mostly women from this part of the country. And we want to know if they cook a lot.

LEVY: That's really what Facebook says makes it unique. Facebook says that we're the only place that can give you these super micro-targeted ads of the people who are exactly the kind of people you want to reach, who are most likely to be interested in your product.

BLOCK: Are there algorithms maybe that are scanning for words? If I post something that says, boy, that chocolate pudding was delicious, but I really wish I hadn't eaten it. Am I going to start seeing those ads pop up for, you know, how to get rid of belly fat? Is that how it works?

LEVY: I don't think right now that a big part of what they're doing is, you know, doing textual analysis on the things you post there. More likely, what they're looking for is your interests. And what Facebook has done is it's ramped up the way that it can get you to share your interests and your likes and your plans with Facebook by - most recently by this thing called the timeline, which is rolling out to everyone within the next week, really, where all the information that you've ever shared with Facebook shows up, and they invite applications developers to create applications to extract more information from you. That's also fair game for advertising.

BLOCK: I was looking at one of your articles, Steven, and you talked to Mark Zuckerberg who told you our belief is that people own their data, and they should be able to share it or put it wherever they want. That's Facebook's message. What do you think about that? Because in a sense, you really aren't owning your data anymore, right? I mean, you're giving that data over to Facebook. You're agreeing to do that. Who does own it?

LEVY: Well, that's a good question. I mean, you know, Facebook treats that information like it has access to it, and indeed, that's the agreement. Facebook doesn't charge its users money. You don't pay $8 a month to use Facebook. You use it with the understanding that they're going to monetize the system in someway by advertisements, and, of course, this is the way they've chosen to do it there. What I think Mark was trying to say was that they're not going to give it away to other people, and that you could pull it out. You can shut down the curtain and end your relationship with Facebook.

BLOCK: OK. Steven Levy, senior writer with Wired magazine, thanks so much.

LEVY: Thank you.

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