Facebook Is Headed for Madison Avenue

October 17, 2007: 8:24 PM ET

picture-63.jpgWhy bother to rob banks? Facebook is where the real money is—and the fast-growing social network has not yet begun to tap its potential cash flow. But that will change within the next few months, says founder Mark Zuckerberg.

The lead-off batter at day one of the Web 2.0 Summit in San Francisco today, Zuckerberg turned in his usual deadpan performance, and yet managed to divulge a lot in what little he said.

The most interesting tidbit had to do with where the young "it" company is headed in the near term. Moderator John Battelle asked Zuckerberg if he could let the audience know about any "places that Facebook might want to colonize"—an important question for Facebook developers who presumably want to avoid competing with their host.

"Well there might be something in ads," Zuckerberg replied. "In the next few months there might be something in that."

While Facebook currently serves a few ads on user pages, the revenue stream is pretty measly and is believed to amount to somewhere south of $125 million a year. The CPM—the cost per thousand to advertisers for showing their stuff—must be awfully cheap, judging by the junky ads that litter the site. It's no secret that Facebook intends to do a better job in the advertising arena. The key to its model is leveraging what Zuckerberg calls the "social graph"--that is, your connections to your friends. It's not hard to imagine a Facebook advertisement that says, in effect, "here's a book that half of your friends are reading. Want a sneak peek at the first few pages?"

Of course, it's going to take a lot of human capital to execute that kind of service -- and build it out into what could be the first great company of the 21st century. Facebook currently employs 300 people in its Palo Alto, Calif., office. Zuckerberg said that number could swell to 700 employees within a year.

Battelle asked if the company was headed for an IPO. "You have years before that event," said Zuckerberg. "I'm not saying it's never going to happen. But it's definitely years out."

Meanwhile, Zuckerberg did little to squelch rumors that his company is considering taking a fat round of fresh investment; Microsoft (MSFT), Yahoo (YHOO) and Google (GOOG) have all been mentioned in recent days as possible suitors. Zuckerberg is reported to have refused offers that would have valued the company at many billions. When asked how the search for new funds was going, Zuckerberg answered candidly: "It's going well. It's almost wrapped up."

"Don't you think you're selling yourself short at $15 billion," Battelle asked, sarcastically.

"We'll see," said Zuckerberg, and paused. The audience seemed to get the punchline and laughed. -- Josh Quittner

For more on Zuckerberg at Web 2.0, see Techmeme's coverage here.

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About This Author
Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

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