In the eight years that Facebook has been providing users with a platform to share their personal data, the social network has time and time again been criticized for violating privacy in its quest to be an ad platform. Facebook’s recent partnership with Datalogix—a service that tracks whether people who view ads on the site end up buying the advertised products in stores—has again raised fears among users about how the social media giant is turning their personal data (both on-and-offline) into a revenue-generating strategy. To understand what exactly this means and how we got to this point, we have to go back to when it all began.
A short history of Facebook and its fight for revenue
Facebook launched in 2004, received its Series A shortly after, and was valued at $98 million dollars by the time it received its Series B in 2005. A year later Facebook opened up to the general public, closed its Series C with a valuation of $500 million, and then its Series D with a valuation of $15 billion—but the company was still far from profitability.
While Facebook’s worth continued to grow, investors began to question the company’s earnings capabilities. In 2008, after passing its 100 million user mark, Facebook began focusing on its monetization strategy and reached profitability in 2009 largely through advertising. Since then, however, while the company’s user-base and revenues have been increasing, the rate of advertising as a percentage of the company’s revenue has been steadily dropping.
As Facebook began focusing on monetization and leveraging the power of its personal information database, alarm bells began sounding for privacy advocates and concerned users who were starting to wonder what the company was doing with this data. Despite these privacy worries, Facebook continued its high user growth rate and passed 500 million users in 2010.This past February, Facebook went through a highly-anticipated, controversial IPO—opening at $38 per share at a valuation of $100 billion and then dropping below $19 a share just a few weeks later. Investors began to worry and marketers questioned the effectiveness of advertising on Facebook—with big names like GM completely pulling their ad dollars and concluding Facebook ads were “ineffective.”
Facebook, which was competing with heavy weights like Google—the world’s largest display advertising network—for ad dollars, needed to find a way to prove the efficacy of its platform. It opened up its real-time bidding ad–exchange (FBX) in September, and this month, reported hitting the one billion-user mark.
Try as it might, Facebook can’t compete with Google
Last year, Facebook’s advertising revenue grew 69 percent from the year prior, to hit $3.1 billion. In contrast, competitor Google’s total advertising revenue grew nearly 30 percent to reach $36.5 billion. But while advertising rates on Facebook are increasing, click through rates (CTRs) aren’t keeping up.
The average CTR for banner ads in the US is .1 percent, but a Webtrends report found that Facebook’s 2010 CTR was only .051 percent while Google’s was .4 percent—almost 10 times as high. And while advertising rates of Facebook ads in the first quarter of 2012 rose by 40 percent, CTRs reportedly fell by eight percent. Not only that, but while the average CTR for Facebook ads decline by half just two days after being released, advertisers on Google reportedly drive 20 percent of conversions through the search engine’s display network.
And in terms of what the two companies offer in the way of targeting, Facebook is still far from catching up to Google. While Facebook offers targeting by education, workplace, Likes, location and demographics, Google lets you target based on topics and interests, contextual keywords, location, demographics, and also offers the ability for advertisers to extend their audience by retargeting.
To persuade marketers to spend an increasing share of their ad dollars on Facebook despite the not yet promising numbers, the social network needs to find different metrics to prove that their ads are equally or more effective at producing conversions. Unable to challenge Google in terms of display ads, Facebook has turned to new methods to try to prove that it can compete in terms of offline conversions.
When the times get tough… the tough get invasive
All of this is why Facebook is getting creative. To prove the value of its ads, the company turned to Datalogix to help it gather information around the offline activities of users to show that even if CTRs weren’t high, conversions were.
“As marketers look to build digital campaigns to connect with and influence consumers, many are asking how best to measure success and optimize the impact of their ad campaigns,” the Facebook blog post announcing the partnership explained. “Since the early days of digital advertising, online marketing has been focused on optimizing ad campaigns for the click. But while clicks are an effective way to measure campaigns designed to drive traffic and fulfill direct response goals, increasingly, research from firms like Nielsen suggest that clicks aren’t the right metric for the broader set of marketing objectives beyond direct response.”
But Facebook’s new partnership with Datalogix has consumers deservedly worried that for the first time, their private, offline purchasing data—from information on personal doctor’s prescriptions to data on dietary choices—can be combined with their activity online and then sold to advertisers. It’s a whole new level of invasiveness, and brands stand to profit far more than users even hypothetically could.
What is Datalogix and how will it work with Facebook?
Datalogix has purchasing data from a reported 70 million U.S. households covering a $1 trillion in consumer transactions; the data is largely drawn from loyalty cards and programs at more than 1,000 stores. For each of these users, Datalogix creates a Datalogix ID number that is then matched to Facebook users, who by default are opted into the program. By matching personal data like contact information associated with both the loyalty cards and Facebook accounts, Datalogix can track whether people bought a product in a store after seeing an ad on Facebook.
Datalogix says users’ personal information is made anonymous and collected into different groups of people who saw or did not see an ad, arguing that since data was aggregated by group, it doesn’t pose any privacy violations. Once Facebook turns over data on which group was served a specific ad and which group wasn’t, Datalogix generates a report showing the contrast between the two groups in terms of who actually went out and made purchases of the advertised product or service. This data will help Facebook—and in turn, advertisers—understand how ads are performing.
To date, the two companies have measured 45 ad campaigns and reported that in 70 percent of cases, for every $1 spent on Facebook ads it earned an additional $3 in incremental sales.
Time to kiss your offline privacy goodbye
As you can imagine, this new partnership has caused many privacy advocates to speak up, noting an evolution of Facebook’s infringement on user privacy from collecting and owning user data on its own site, to indulging itself with information of users and non-users on pages outside of Facebook—so long as the site included a Facebook Like button. But with the new partnership, Facebook now has access to the offline data of its users. And unlike data users share on their social media profiles—data created with the intent to share and the knowledge that it might be passed along to third-parties—this offline data is private information that consumers probably don’t realize is being created in the first place, let alone being shared with third parties.
“The Datalogix/Facebook partnership isn’t surprising because data brokers are combining offline and online data much more often lately,” senior privacy strategist with Abine, Inc. Sarah Downey explains. “It’s a process called ‘data enhancement,’ where lots of companies who each know a little about you combine their information to get a much clearer and more detailed picture of who you are. They claim it’s only used for advertising, but the real, demonstrated harms of this data collection include identity theft, stalking, missed job opportunities, and lowered credit limits.
“The argument that data isn’t harmful because it’s aggregated or de-identified doesn’t always stand up. Plenty of so-called non-personally identifiable information has been tied to individuals and re-identified with ease. I’d hope that Facebook took extra precautions to prevent de-identification, but any data sharing runs the risk of being tied back to individuals,” Downey says.
Jeff Chester, executive director of the privacy group Center for Digital Democracy, echoes these concerns. “Individuals are being targeted through the Facebook Exchange. Facebook is working with many different data collection and targeting companies including Datalogix to track and market to individual Facebook users. This is not disclosed by Facebook and users have no control over this.”
Consumers who participate in loyalty programs don’t realize the data gathered about their purchasing history will be shared with third parties and those who are aware that their data might be sold, aren’t necessarily happy about it. An academic study titled Americans Reject Tailored Advertising and Three Activities that Enable It found that 86 percent of those surveyed did not want online advertisers to tailor ads based on their offline activities.
Facebook’s priority: Profit at all costs
Facebook isn’t the only company using offline data to target online viewers. Earlier this year, for example, Yahoo announced it was partnering with ad company CampaignGrid. Through the partnership, Yahoo could tap offline data to target millions of registered voters based on things like party affiliation, voting history, age, location, and more.
But Downey noted that Facebook is unlike any other company when it comes to the amount and depth of information it has about its users.
“The difference here is that Facebook isn’t just another company: It knows more about its one billion users than any other company in history. It was just a matter of time before Facebook started doing data enhancement, given that they have a duty to shareholders to live up to their valuation, and proving that Facebook ads work in brick and mortar stores is an important part of demonstrating their value,” Downey says.
“This Datalogix partnership, combined with their ad network development (currently called Facebook Exchange), shows they’re aiming to track you everywhere you go, both online and off,” Downey adds. “What they’re doing is completely against consumers’ expectation and desires, but it follows Facebook’s historical trend of gradually eroding its members’ privacy. Facebook is the master of small changes that make the most of your personal information, even if you aren’t comfortable with them.”