Meet the man behind Facebook's ad revenue

February 22, 2013: 1:55 PM ET

David Fischer, Facebook's vice president of business and marketing partnerships, has helped Facebook built its profit engine.

130221181537-david-fischer-facebook-340xaFORTUNE -- At the beginning of 2012, Facebook's mobile ad revenues were literally non-existent. By the end of the year, they generated 23% of Facebook's total advertising revenue. With more users logging onto Facebook from mobile devices than ever before, a new search feature that competes with Google, and increased scrutiny from Wall Street, Facebook's ad strategy has received considerable attention both inside and outside the company. Can ads exist on the site without harming user experience? What about Facebook's (future) video ad strategy? How many mobile ads are clicked accidentally – as a result of the "big thumb theory"? Is Facebook selling user information?

On Feb. 13, Fortune's Adam Lashinsky interviewed David Fischer, Facebook's vice president of business and marketing partnerships, at a conference on the future of media hosted by Stanford's Graduate School of Business.  A lightly edited transcript of their conversation, as well as questions from the audience, follows.

ADAM LASHINSKY: Good morning, David.  Good morning, everybody.

DAVID FISCHER: Good morning, Adam.

ADAM LASHINSKY: I'm going to start with some history. An interesting comparison between Google and Facebook is that -- Google and Facebook did not start as advertising platforms. [The founders] didn't have that in mind at all, presumably. And you came into both companies at a time when there was no revenue or no infrastructure for revenue, and said, "All right. Let's build one." Explain how you started from really I think from a business perspective a blank sheet of paper.

DAVID FISCHER: Yeah, I think -- I'll take these two cases, but I think it's true for a lot of companies, successful companies in the Valley and beyond, about defining a business model and where that comes in in the process of it. One of the things that was interesting when I was at the [Stanford Graduate School of Business] and then went to Google that struck me is, you know, when you talked about building a company there it always started with the business plan and monetization plan. And for Google, for Facebook, for lots of companies, it started with a consumer plan and what was going to be a great product for consumers, and monetization came later and not in a straight line. It was not linear, it was sort of bumpy to get there and figure it out.

Now, it turns out that the companies -- these two companies that I've been at and I'd say for a lot of companies, advertising is a phenomenally good, efficient model that works really well. When I was at Google we got this question a lot, and at Facebook we get this question is "When are you going to diversify in your revenues?" But when you're talking about companies that have hundreds and thousands of advertisers, that [are] around the world, that's a fairly diversified stream, and it actually is quite efficient to -- you know, as margins or other things you care about on the business side goes -- it's a good business to be in. So that's sort of the starting point. So there's lots of ways you can think about monetizing those companies or other companies. I just happen to like the advertising model.

Now, how you actually build it, I think what's interesting is -- with respect to the two companies -- is in the DNA, they're similar in so many ways compared to most large successful companies, and if you compared, you know, took any set of ten companies in history in this country and the world you'd say, "Oh, there's a lot of similarities there." But Google at its core was a company built on the what: information and discovering information. And Facebook is a company built on the who: on people. And so that advertising model works effectively in both cases, but it starts from a different place, the company starts from a different place, and we can maybe talk a little bit more about that.

In terms of how you actually build it, the key to any of these things, as I'm sort of a business guy, and you need an effective product. And so it starts with a lot of partnership figuring out building something that will -- how do you show the right ad to the right person at the right time and create a sense of value. That doesn't happen day one. In both cases you need to kind of go in fits and starts, but I think the idea is that it adds real value when you have people engaged and spending time and, you know, in a place like Facebook spending more time than anywhere else in the web, and you'll have the opportunity to show them some useful commercial material, you create value in that.

ADAM LASHINSKY: From a historical perspective, what I find so interesting is that I personally did not understand that Google was a publisher or later that Facebook was a publisher. I missed that. I think a lot of people missed it. But you, Larry and Sergey didn't miss that. Mark didn't miss that. And you came in at both company's stages and said -- you know, you executed that vision. And I'm using publisher in a very loose term. I wonder if you even agree.

DAVID FISCHER: Yes. It took me a while. Like I got my career started as reporter, so I also did not jump to the word "publisher" as quickly as you did, probably because we think about a publisher as something slightly different. But as a creator of content in a world in which if you think about it that way, it certainly -- I think the publisher piece works. And in some ways in Facebook, I think it's much more apt as a descriptor, because everyone, the whole notion of what makes Facebook work is you creating, everyone is a content creator, everyone is a publisher. That dynamic is, if you want to talk about what sets the companies apart, that's a critical piece in terms of what distinguishes them.

ADAM LASHINSKY: I have an image burned in my memory of one of your former colleagues and predecessors, Tim Armstrong, who's now the CEO of AOL, explaining to a group of Time Inc executives, my company -- he was at Google at the time -- he said, "We are not trying to maximize revenue. As a matter of fact, we will not do revenue. We will not do an ad unit that we think is bad for users." And you know, it was astounding listening to him explain this to a group of magazine publishers because they were going, "What? We'll take the money wherever we can get it." Has that continued to be the -- is that the ethos at Facebook, as well? And as the business guy, how do you have the conversation with the engineers, with the creative people about, "Well, there are certain things we can and can't do to make money."

DAVID FISCHER: I think the key thing about Tim's statement, what I think he meant and sort of what I would [say] -- the statement I would say is we are not looking to maximize short-term revenue. We are looking to maximize long-term revenue in a way that is sustainable and will strengthen the company. So really the word is probably we are looking to create maximum long-term value for the company. And I think the point that he's making there and that we grapple with every day is there [are] lots of things you can do in the short run that can hurt yourself in the long run. And we've seen lots -- I mean, Silicon Valley creates lots of great companies, but also creates lots of companies that go like this and fizzle or that never take off, right? And there are lots of ways [to get it right.] It's very easy to get it -- and a million ways to get it wrong.

And to take the example of Facebook, one of the things that we've done quite successfully, but it's still a work in progress, was introduce monetization, introduce ads into the newsfeed and into mobile. A year ago if we were sitting on the stage having this conversation the natural question, you would have said, "When are you going to monetize mobile?" Because we were making exactly zero off mobile a year ago, and we had no ads in the newsfeed. And what was clear and what is clear is that's a huge opportunity and there's a ton of revenue potential there. It is -- people spend more time on Facebook than anywhere else on the Internet by a big distance even between number one and number two. And marketers pay money for where people spend the most time and where people are the most engaged. So the question wasn't, "Gee, is that something that might be a nice business opportunity for us?" The question was, "How can we do that in a way that will hopefully not only balance properly the user experience but actually enhance the user experience?"

So Mark talked about this on our Q4 earnings call a couple weeks ago and said, "One of the things that we're proudest of is when we look at 2012 in the mirror now, that we measure -- one of the key measures for us is around number of users and the engagement of those users." We saw a 50 percent increase roughly in engagement of likes, comments, postings, things like that. The introduction of ads to the newsfeed caused about a 2 percent reduction in terms of people's activity and other things.

ADAM LASHINSKY: I'm sorry, David. What was the -- the 50 percent figure you just gave, what was that? What time point?

DAVID FISCHER: That was just over 2012.

ADAM LASHINSKY: During 2012 you saw a 50 percent increase in engagement on the site.

DAVID FISCHER: Yeah. So if you compare a 50 percent versus 2 percent, right, you get a sense that we're doing a lot right, we're significantly enhancing. Now, I believe and we believe that ads, as we continue to improve the quality and make them better and better, will actually also be additive because we can all agree that there are bad ads. We see bad ads on a billboard, you see bad ads on TV, we see bad ads online. But when we see good ads that are well-targeted, make a good offer and at the right time, we don't usually say, "How do I get out of this?" we say just, "I want that and I'm going to buy that." So we have that opportunity to make ads that are better and better.

ADAM LASHINSKY: You're making the case that -- you have a scenario where ads increase [and] improve the user experience on Facebook.

DAVID FISCHER: Exactly. You talked about us as a publisher, right?

ADAM LASHINSKY: Yes.

DAVID FISCHER: We're a publisher. All of the billion people on Facebook are publishers and millions of businesses are publishers. So the question is how do you enable the creation of content that is additive to the experience, just the same way when I see status updates from my friends, most of the time they're additive. There's -- we all know there are some people and some posts that are -- that might detract from the experience, right? But that's part of the game. And it's the same kind of thing that we want to create those commercial opportunities that are additive.

ADAM LASHINSKY: Can I just see a show of hands of how many people in this room think that ads on Facebook add to their user experience on Facebook? [Very few audience members raise hands] Okay. So that would be my perspective, as well. [Laughter/Applause] Let me be fair. How many in the room look at the ads in magazines and on television? Okay, so maybe 20 percent.

DAVID FISCHER: But how many people feel it's additive to the experience?

ADAM LASHINSKY: Okay, yeah, that would be totally fair. How many people think gorgeous ads in magazines are additive to the experience? [Laughs] That's called putting your tongue on the scale of the question. But this cuts to a really important and existential question for Facebook, which is this. Facebook is a communications tool. I use it to communicate with you, with my wife, with other friends. Is advertising the right revenue model for a communications tool, as opposed to true publishing?

DAVID FISCHER: You want to guess what I'm going to say? [Laughter]

ADAM LASHINSKY: Yeah. No, I know the answer is yes. Conduce me.

DAVID FISCHER: I'll make this a little interesting. Yes, because I think obviously it is a communications tool, but it's also a discovery tool. It's a relationship tool. It's a lot of things. So if you think about [it], put yourselves in the shoes of a business owner. Some of you guys are business owners, some will be business owners and you'll start a company. What does a company want to do? A company needs to acquire customers. It needs to manage a relationship with those customers. It needs to upsell them. It needs to retain or win them back if it loses them. And ideally it wants them to tell other people how great their business is and that you should try it, too. Facebook does all those things, and we have the opportunity and the time to do all those things better.

Now, all those – we can discuss and call it, "Well, that's all forms of communication," but it's also forms of relationship management, forms of engagement. So I think about -- we can talk about the big brand advertisers, but this morning on my mobile -- on my phone as I was looking through my Facebook newsfeed, I saw an ad for Milk Pail Market. I don't know how many people here know what Milk Pail Market is. It's a little grocery, produce store. And that's -- you can argue, is it good for Procter & Gamble and [others]? But that's also really useful. I see that a friend of mine has liked that. They just did something interesting with high school kids around the area, and they're telling me about it, so it's put in my mind, so it's like maybe next time I need to go grocery shopping, maybe I'll actually think about going to Milk Pail Market instead of somewhere else.

ADAM LASHINSKY: Let's talk about mobile, that mobile's probably the most important theme of 2012 for Facebook and 2013. Explain first -- talk a little bit about Facebook's journey on mobile, if you will. You were, I think by all accounts, later than you would have liked to have been to mobile advertising. So talk about that.

DAVID FISCHER: Yeah. And this is I mean one of those great lessons about sort of always thinking ahead and never being satisfied with where you are. Because we could have -- take this back a year, early 2012, we could have sat there and I could have made the case and probably would have made the case if you asked me to about why we were leading in mobile. I mean, like here's your number use for Apple and those kinds of things where, you know, we tended to be the leader. But if you actually peel back a little bit the apps were unstable and the experience, relative to the desktop experience, was an inferior experience, in a lot of things that we do and we weren't monetizing at all.

And so what we really did [was] make a conscious decision, starting with Mark and on down the company, that we were going to transform. And I think a couple of things that sort of give a sense of the way we did this was -- you know, one of the things that Mark said that I think was really important is he said, "Look, if we were starting a company, if I were starting this company now, it would be a mobile company to start. It would be a little bit like Instagram, which was a mobile-only company until last week really or until a couple weeks ago. And that would be the way to start. That's where people are. That's where people are spending their time.

ADAM LASHINSKY: For the uninformed, just to fair, Facebook owns Instagram, so any changes going on in Instagram, you're intimately involved with.

DAVID FISCHER: Yes, exactly. So he said, "You know, we need to think about maybe putting mobile first and being a mobile-first company." So the couple things that we did is we said that everything that we built was going to be mobile first. We were going to fix and go from having apps that people used but that weren't the best to trying to have the best apps. We did a lot of work, and are really excited and think that we made a ton of progress. We realigned the company around -- so everybody was responsible for mobile. Instead of having, you know, basically teams that did newsfeed and teams that did messaging and other things, and then a mobile team on the side that sort of came in and tried to adapt everything to mobile, he said, "No, mobile is everyone's job. Everything we need to do needs to be mobile and that include monetization."

ADAM LASHINSKY: Very important from an organizational structure point –

DAVID FISCHER: Exactly.

ADAM LASHINSKY: -- which I assume is a big topic in this room.

DAVID FISCHER: That's right. And so it really changed. You know, we had to change some of our structures and our operating procedures. And then sometimes small things that you do on top of that, which is, you know, product reviews, which Mark is intimately involved in. You know, nothing goes to the site or on a mobile app or mobile website without Mark looking at it and reviewing it. And he said, "The first thing we're going to do, everything that we look at needs to be mobile first. And then we can look at the desktop. But we really need to -- we have to design for a mobile first experience."

So we transformed all those things. We introduce mobile monetization, and we did all that. I think the proof to us that we'd made -- we were sort of in the right ballpark -- you know, there's lots of things we still need to do and it's always a work in progress. But if you look at the U.S. December ComScore numbers about time spent on Facebook, we're the number one desktop site. People spend 6.5 hours, 6-plus hours on Facebook, which is a big. On mobile ... average use in the U.S. was 11.5 hours. So people, the engagement level, I mean, that's unbelievable, twice as much time as a mobile user. And we've seen globally mobile users have surpassed desktop users. So if you're not building that way, if you're not a mobile first company, you're way late, and you're in trouble.

ADAM LASHINSKY: But your last comment was about global ComScore numbers, not about --

DAVID FISCHER: Those are U.S. ComScore numbers.

ADAM LASHINSKY: Okay. And how are you seeing engagement on Facebook mobile versus Facebook desktop?

DAVID FISCHER: Those were Facebook numbers, ComScore data -- about Facebook use on mobile versus desktop.

ADAM LASHINSKY: And talk about the -- First of all, I understand that mobile ads on Facebook are -- actually get you higher prices than desktop ads, is that correct?

DAVID FISCHER: Yeah. We don't break out prices that way. But a couple of things that are important to understand about -- let me start with the big picture. So we went from zero last Q1, [and] our Q4 recently reported with 23 percent of our ad revenue as mobile. So that's –

ADAM LASHINSKY: Zero percent at the beginning of the year to 23% – that's astounding.

DAVID FISCHER: 23% – yeah. So, and we feel good about the progress that we've made. Again, I think from the perspective -- you know, a lot of the way that Mark[and] clients that we work with have approached this, which is to say, you know, desktop is sort of the bread-and-butter, and then we need to find some mobile budgets, we need to find some solutions. And frankly a lot of the solutions have either been -- you know, pop-ups sort of died a long time ago on the desktop, but the equivalent of pop-ups -- they kind of come over the app where you kind of get something along the bottom.  As you scroll it's going to be there. I think the beauty of our solution is that first of all, it doesn't force you to decide, "Do I want to be a desktop advertiser or a mobile advertiser?" It's a "I want to reach users on Facebook, and I want to target -- not only I can target broadly, but if I'm on desktop or if I'm on mobile," if they want to reach males in California around 18 to 44, which is going to be a lot of this audience, including me.

ADAM LASHINSKY: Thanks a lot. [Laughter]

DAVID FISCHER: "-- you can do that, right?" And we will reach you in the newsfeed on your desktop or mobile, wherever you are. So it translates across, and it's part of the newsfeed experience. And we think that speaks to a lot. And so that -- you know, I mentioned that ad I was seeing this morning, if you actually think about -- if I took a picture of my screen, it basically was the whole screen, the ad was the whole screen. And again, if I -- if it wasn't relevant or I didn't like it, I would just scroll right past it. It wasn't like a "Hey, I've got to sit and look at this for 10 seconds until it disappears off my screen."  But it's immersed so that it's part of the experience, and maybe it's working really well. So our advertisers have seen a lot value in this.

ADAM LASHINSKY: Because it's so big have you done any analysis of what people call the fat thumb effect: people accidentally hitting that big ad?

DAVID FISCHER: We have, and we do that for every kind of experience. So we try to optimize for that because the whole newsfeed experience is about the scrolling. And so we made changes to this over time. We're constantly playing with the size of the buttons and the sensitivity of the buttons. But it is -- it's an issue, but it's not such a big issue for us right now.

ADAM LASHINSKY: And just to be clear, I read in analyst reports that mobile is monetizing at a higher rate for Facebook, but you're not commenting on that.

DAVID FISCHER: Yeah, I choose not to comment on that.

ADAM LASHINSKY: Talk about what is Facebook Exchange?

DAVID FISCHER: So Facebook Exchange is a way to basically -- well, let me try to do the 1- and 2-minute version. And I see some people I know in the audience that could do a better job at this, who are experts on this stuff. But increasingly buying of ads online is happening in a programmatic way, which means instead of saying, "I'm going to go to Google to buy this and to Facebook to buy that," you say, "I want to reach this audience." It used to be called real-time bidding. The basic notion is that you just go through a middleman who tries to put your ads in the right place at the right time, and then layers in other things like particularly re-targeting. You've probably all seen if you go to a particular site, you're shopping for something and maybe you put something in the shopping cart but don't buy it. So you start seeing these ads elsewhere. So it enables [ad platforms] and other third parties to actually do programmatic buying on Facebook. So it's basically a new way for advertisers to buy ads on the right-hand side. But it's just a new way to make it easier, and that's part of that -- the programmatic buying for advertisers to buy and for demand on Facebook.

ADAM LASHINSKY: And there have been widespread reports that you're going to buttress the Facebook Exchange by buying the Atlas business from Microsoft? Are you prepared to announce that this morning? [Laughter]

DAVID FISCHER: I don't have any comments on that.

ADAM LASHINSKY: Video ads. You do not currently do video, is that correct?

DAVID FISCHER: That's right. Well, let me try to answer that. We do in terms of -- as part of the move to the newsfeed monetization that I talked about. You know, you think about your experience, either as a user, which is probably the easiest thing because most people around here just use Facebook personally, or if you manage it for a business, posting something, you can post a video and share that with your friends. You can post a photo. You can post an album. You can post a link. As an advertiser, you can do all of those same things. So when you see advertisers posting videos and then promoting that and sponsoring that as an ad, so we enable that. So that exists today. So I'd say you're wrong to say we don't have video ads.

But we don't have a unique -- we get asked all the time, you know, "Can I buy something that pops up over -- you know, it takes over the home page to promote the movie that's coming out?" You know, a new movie that's coming out on Friday or other things, we don't do that. So we don't have a distinct video unit from [that angle] -- sort of what I just described.

ADAM LASHINSKY: And do you plan to?

DAVID FISCHER: We're certainly looking at it. We look at a lot of things. Video is a fast-growing area and it's something that marketers love. What we want to figure out is the intersection of what users will love and what marketers could love, and if we can find that then it's something that we could certainly consider doing. And I think what we're unlikely to do is what I just described, is those kinds of what we in the business call home page takeovers, that kind of thing. But we see that the video ads at least that happen in the newsfeed the way that I talked about, when they're good content and targeted well, get good engagement and good results. And so there's certainly an opportunity there, and I'm sure we'll continue got come up with some great ideas.

ADAM LASHINSKY: David, is there a video -- is there someone else's video ad unit in the industry that you particularly admire and you think is a good user experience?

DAVID FISCHER: You know, I think YouTube has moved in the right direction I think by putting more control in the users' hands. It's interesting with their 5-second preview thing that I think is putting more control [in users' hands]. I think a lot of it has to do -- there are sort of two sides. There's the publisher side and what people are enabling, and then I think there's the marketer side about adapting form and adapting content to that format.  The 30-second spot that has been around for decades and is very effective on TV and also sort of the bread-and-butter of most brand marketers is not right. And that's where sort of the start is. Let me take that and drop it on the Internet.

We've just probably all experienced that and know that that's not a great experience. But if you think about trying to start separately saying, "What is the type of video experience that actually would be good?" Typically very short, maybe a little bit more dynamic, maybe a little bit more interactive. So I think we're kind of early. I think we'll look back in five or ten years at video ads and say a lot has happened to make it a lot better, and that will involve the fact that people actually redesign these specifically for an online experience.

ADAM LASHINSKY: I'm dwelling on this for two reasons. One is that Wall Street expects that Facebook will introduce a video ad unit this year. And the second thing is and it comes back to what you said earlier. From a business case study perspective, it's just astounding. You're managing a business operation that can have a product that doesn't exist at the beginning of the year and accounts for a quarter of revenue at the end of the year. So presumably this is not a trivial pursuit for you on how can we do video add-ins correctly. It's a very important topic for you.

DAVID FISCHER: It's a really nice opportunity. We're in the fortunate position, there's a lot of nice opportunities out there, and for us it's time to figure out where we think we can make the most progress and therefore what we're going to pursue developing. You know, one of the things I would just mention that's interesting is, you know, I don't know what if you took a good survey what size people would think Facebook is as a company. And we try to operate as a small and lean company and put a big premium on moving quickly. And, you know, we're big by most standards but we're actually quite small relative to -- less than 5,000 people -- relative to what people would think. And so being -- prioritizing and making hard decisions up front about what we are and we aren't going to do and trying to assess where our biggest opportunities are is a big part of the job.

ADAM LASHINSKY: And one of the company's big new initiatives is what you call the Search Graph. You devoted a whole, big media event to announcing it. Explain very briefly what it is, and secondly what your monetization plans are for it.

DAVID FISCHER: Sure. So Graph Search –

ADAM LASHINSKY: I'm sorry, Graph Search.

DAVID FISCHER: That's all right. How many people here -- it's being released slowly, so I don't know how many people here have had a chance to play with it. That's pretty good, a reasonable number of you, 10 percent or so. But what it is is –

ADAM LASHINSKY: Is that -- do you know off the top of your head what percentage of all users have been admitted?

DAVID FISCHER: I don't. We're releasing it slowly [to sort of allow us] to get user feedback on it. It's conscious that it's called Graph Search, not Facebook Search or something else because we want to be clear this is not our answer to Web Search, you know, this isn't Google on Facebook. This is -- there's a lot of incredibly valuable content that's valuable in any of a variety of ways within Facebook, but it's been very hard to tap into that. So it's the type of -- so I might want to say something that could be very relevant to an audience like this is people who went to the [Stanford Graduate School of Business] and worked at -- pick your favorite tech and media company or particular types of companies, that might be a really relevant search.

It might be next -- I have a cousin who's getting married in Vancouver next weekend. I've never been to Vancouver, so maybe I want to look up friends who have been to Vancouver since 2010 and I might want to reach out to some of them instead of just going to the Hotel Frontier. And a lot of these posts, we actually can see people with posts on Facebook to their networks to say, "Hey, has anyone been here or worked there or done these kinds of things?" And we think that enabling this is incredibly powerful, and will just open over a ton of use cases and a ton of things that are different from the way we think about search today.

So in answer to your question on monetization, we're not monetizing this today. I'm excited about the opportunity, but right now we're more focused on the user side. But you can imagine, you know, take the travel example I said about going to Vancouver, you know, that could be if I'm searching about Vancouver vacation activities to do, that's something that becomes very relevant and valuable. I mean, you can think about applying that in lots of different -- you know, things I might buy, whether it's a new car, new laptop, new TV, getting recommendations from my friends, from other people in my social crowd, in my network, that's something that becomes really valuable.

ADAM LASHINSKY: In theory, you should monetize the same way that the newsfeed does, is that right? It's content.

DAVID FISCHER: Yeah, it's content. What's different about it is that you suddenly get a different type of intense signal. In many of the cases that you can imagine, yeah, that's right.

ADAM LASHINSKY: So last question before we go to the audience, which is talk about -- can you discuss the mix of advertising, of advertisers, that is – of what you would define as top brands. You mentioned top brands earlier -- versus this Milk Pail company.

DAVID FISCHER: Sure. So we have -- the way we think about it is we think about we sort of have four main types of advertisers. We have the large brands, which are sort of folks in this audience probably know what a brand, you know, have a sense of brand and the value of brands and you think about the type of TV ads we typically see or glossy magazine ads you might see. We have small and medium businesses, you know, your typical SMBs. We have direct response advertisers, which has sort of been the search bread-and-butter. If you search for running shoes, you need a pair of running shoes, you buy a pair of running shoes. And then there are developers, which is sort of the newest and most -- in some ways the most interesting because it's not as much a developer market. And if you think about the mobile experience and you're a developer, if you're building a company, building a startup today, probably the most important thing is to get people to download that app. That's something, so we have an app unit that basically will promote your app. We get the targetability of it is really strong and really powerful.  It's early, but we're seeing really good get results on that front. So we think about each of those demographics -- sorry, each of those segments to be –

ADAM LASHINSKY: Can you break them down by percents?

DAVID FISCHER: I, uhh, no.  [Laughter]

ADAM LASHINSKY: I should have said will you break -- not can you.

DAVID FISCHER: And it's interesting because three of the four -- you know, each of them has their own dynamic. You know, brands big and understood massively goes towards TV. Direct response sort of has a big direct mail component and a big search component to it today. SMB is interesting because it has -- there is yet to be the digital solution that successfully replaces the Yellow Pages. I would guess no one in this room does much with the Yellow Pages besides take it from your front stoop to the recycling bin. But where does everyone go, what is the one place that has -- you know, it used to be you go to the Yellow Pages to find that local business. And if we had more time, I'd tell you why Facebook is a logical solution for that and the developers we talked about. So each of these are -- we think are big [building] opportunities.

ADAM LASHINSKY: Hasn't Google more or less completely replaced the Yellow Pages? I just go to Google and say I need a plumber in Potrero Hill in San Francisco. That works very well.

DAVID FISCHER: So I think they do a bunch of things well, but to me that experience is not -- I think there's a bunch of use cases where it doesn't work so well. And I think that there's two sides to it. I think there's the SMB, the actual business owner side. If you went to them in the past or today and said, "Business owner, what do you do to get customers?" they would say, "I need the Yellow Pages. They know [customers can find me in] the Yellow Pages." If you ask them today "What do you need to -- where do you need to be investing your time and money?" I don't think they'd know -- you know, there's Yelp, there's Google, there's all of these different things. There [are] aggregators of places that will help you get distribution. But it's not clear how really to solve the problem.

ADAM LASHINSKY: I'm looking for people standing up, and if there aren't people standing up [from the audience], I'll keep going. So please stand up and come to the microphone.

DAVID FISCHER: Save me from Adam! [Crosstalk/Laughter]

ADAM LASHINSKY: Okay. We have people going to the microphone. I'll wait patiently. It's great I think for everybody to know if you identify yourself before you ask your question. Go ahead.

AUDIENCE QUESTION: Josh Constine from TechCrunch. So you talked a little bit about video ads. Right now the Facebook home page is relatively static. There's no autoplay videos, no animated GIFs. Do you think that bringing autoplay videos or any autoplay content and autoplay ads on the home page would disturb the user experience, or is there a way that you can make something move on the home page without drawing everyone's eyes away from all our friends?

DAVID FISCHER: I like the way you phrased the question because I believe there are ways that we can do it. I think there are lots of ways we could do it which would be distracting and therefore disruptive to the experience. But I also think that if we can be innovative and creative about how we do it, that there are potentially ways that we could do it that would balance the user experience with the advertiser experience and do a good job at that. You know, we haven't put a product out yet because we haven't yet had a solution that we're comfortable with. But that would be a key part of the goal in what we do there.

ADAM LASHINSKY: Thank you. Next, please.

AUDIENCE QUESTION: Hi, I'm Adam from Google. David, you mentioned the increased focus that Facebook is putting on mobile and understandably so. In light of that, have you taken some kind of decision to launch Graph Search first on the web and then maybe expand on it? When we can expect to see it on mobile?

DAVID FISCHER: So I think a lot of this had to with we had a product that we really liked and we needed to play around with internally that we wanted to put out, and this was the fastest and easiest way to build that experience. So obviously everything I said about mobile happened. Just to repeat that and say that is the reason, we really want to get it to mobile soon. We don't have ...

ADAM LASHINSKY: Let me just push on this question. Because what you really wanted to ask you is, "You're not really mobile first, are you? If you do something like that?" [Laughter] It's a statement – you made a statement, that's what he's saying…. I'm here to help. [Laughter]

DAVID FISCHER: Yeah, but with rules. You know, you're going to have acceptance rules that you accept consciously and for a reason.  So yes, we are a mobile first company and in this case we launched the product separately. It's easy to say and I think folks will appreciate that we would love to get it out there, and as soon as it's ready, it'll come.

ADAM LASHINSKY: Adam, would you care to give us Google's analysis of Graph Search?

AUDIENCE: No comment. [Laughter]

ADAM LASHINSKY: Please.

AUDIENCE QUESTION: Leland Kim of [University of California San Francisco]. I wanted to know on the desktop version of Facebook, you customize your ads and you can X it out and say, "I don't like it because it doesn't apply to me or…" On the mobile version, is there way or a feature to customize the ad experience so that you don't get a bunch of things that don't apply to you or things that you don't want to see on your newsfeed?

DAVID FISCHER: Sure. So just to pick up on your description, if you hover over an ad on Facebook there's a way to give us feedback and to X out -- and that's really a valuable signal for us to get a sense of the user experience. So we certainly want to replicate that, particularly as we morph our revenue to more of our monetizations coming from mobile, because, one, we want to create that great experience for you as a user; two, want to actually understand not just what is your overall browsing experience, but we want to actually understand what it is that you're doing.  So that is something we'll want to introduce.

ADAM LASHINSKY: Follow-up question. So at least on the desktop version that's on the side, the ads are on the side.  On the mobile version it's kind of embedded within your newsfeed, and sometimes it looks like just a regular newsfeed that your friend might be posting. Is there a way to maybe color-code it so that you know it's an ad versus it's part of the newsfeed?

DAVID FISCHER: Yeah. You know, we spent a bunch of time on that.  So every one everyone says sponsored on the top, which is the distinguishing point. And I think the -- so that is our effort to try to do it. We are very interested in making that distinction. At the same time, what's interesting is there are some ads, for example, I might -- it might happen that I don't like Milk Pail Market. I haven't liked their page. If I had, they might run an ad and I might see that anyway, or it might be that the fact that they put a little more budget behind it means that I might have seen it -- I might not have seen it even though I liked it, and then I would see it. So that algorithm kind of gets complicated. So finding one solution that is easy but doesn't create -- you know, we could shade it partially, right, depending on how much -- whether I liked it or not. So for now, that sponsored word.  You know, we think it provides a pretty clear indication of monetization.

ADAM LASHINSKY: Since we've been having so much fun already, I think we should try to end on a controversial subject, which is –

DAVID FISCHER: Does anyone have another question? [Laughter]

ADAM LASHINSKY: No, you're well-prepared for this. I'm going to ask it in a gentle way. I want to talk about privacy as a, you know, large topic. There's this -- you all periodically confront this nagging conventional wisdom in the ether that you are selling advertisers my data, which you're going to vigorously tell me is not true. So would you explain first of all that it's not true, and why this persists.

DAVID FISCHER: You did a good job ... [Laughter]

ADAM LASHINSKY: And here's the part where you can fly free is what you are doing with my data and what you are selling to advertisers.

DAVID FISCHER: Sure. So the key distinction is imagine that I'm an advertiser and you're the Facebook user. And let's just imagine a wall here. So I can say, "Look, I want to target men in the Bay area, and I want to target people who are fans of Fortune magazine because I'm assuming you like Fortune." [Laughter]

ADAM LASHINSKY: Probably a good idea. [Laughter]

DAVID FISCHER: And so on. And then we can start to go into your interests and the things that you like and target on all of those things. And so I have the ability to target really effectively and to reach you that way.

What does not happen, and why the word -- why I really dislike the -- you know, people talk about selling user data, is nowhere in that process do I get a feedback to say, "Hey, you were interested in men who live in San Francisco. Here's Adam Lashinsky and a few hundred thousand other people that you want to reach, just to say, "Great, I'm going to show your apps to those people."  And then if you choose to -- you know, I might make an offer, and say you might claim that offer. I mean, there's lots of ways you might choose to interact if it was a good and well-targeted ad, which obviously is what we want to be running. So that's a critical distinction.

And that's not different on some level. You know, people -- why do advertisers buy the Super Bowl on TV as a TV ad or buy American Idol or buy soap operas or buy whatever? Because they're trying to reach a target audience. It just happens we can do it much, much more effectively and so you actually reach the -- you know, if you just say, "I just want to reach females, 18 to 44 on soap operas," you have a good sense you might be reaching those people On Facebook you can basically know that is who you're reaching. So that's part one in terms of the advertiser privacy.

We've had -- privacy has been something that has been an issue for us, to your question. We get a lot of questions about it. We basically have three guiding principles to how we think about privacy, how we do we design our products and the privacy control system. Number one is around transparency, that people should now what our policies and practices are. Two is about control, that you should have control.  And I'll come back to that in a second.  Three is about accountability. We're accountable to our users. We're accountable to regulators, right? Those guys pay a lot of attention and those relationships are important to us for obvious reasons.

And the control planning is critically important because if you've been a Facebook user for a while, you know we started out with a basic set of controls.  And then I guess it's two years ago what we did is we way dialed up that control to the point where like you could go to the screen and literally check like every single type of action we do on Facebook with the settings.  The result was like, I could tell you, "Hey Adam, you have all the control in the world" to the point that some -- a few people are overwhelmed. So we realize that was too much.

I think the solution we've arrived at, which -- and the feedback we get is that we think it's a good one -- is that we've introduced inline control. And so when you put in a post  -- I posted something yesterday relating to an article and I made that public. As far as I'm concerned anyone who wants to know what I'm thinking about, what I'm talking about, I think this is worth reading and I'm sharing that. I've got hundreds of photos of my kids, skiing with my kids last weekend, which I want to share with my friends and my family, but it's not -- you know, I don't necessarily want to share with the whole world. And so as I post that, I choose friends, right? You can choose -- you know, there's a lot of stuff I just post internally to Facebook, stuff that we're planning or things that we want to address. And so creating an easy-to-manage and powerful experience, powerful controls to do that is something that is incredibly important.

So as we build new products, it will -- Graph Search, one of the things that we're most proud of with Graph Search is that it is privacy aware in every sense. But if you think about it, it's actually -- this is one of those things that's really interesting and challenging from a computer science standpoint.  As a user, your point is like, "Hey, if I posted a photo that's just private to my family, then when people type photos of David Fischer, you don't necessarily want those responses shared. So that's -- and we respect that, and that's a critical part of the results that we show for Graph Search.

Now, to do and to do that so that you get results real-time is actually quite a challenge. We talked about why did we release it as we have, why are we proud of it, why do we think it's innovative, that's a big part of the reason.

ADAM LASHINSKY: David, it sounds like you have a lot on your plate and a lot of exciting stuff, and this was fantastic. Thank you.

DAVID FISCHER: Thank you, Adam.

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About This Author
Adam Lashinsky
Adam Lashinsky
Senior Editor at Large, Fortune

Adam Lashinsky is a San Francisco-based editor-at-large for FORTUNE, covering Wall Street and Silicon Valley. Lashinsky joined FORTUNE in 2001, after two years as a contributing columnist. Prior to joining FORTUNE, Lashinsky covered Silicon Valley for TheStreet.com and The San Jose Mercury News. A Chicago native, Lashinsky holds a B.A. in history and political science from the University of Illinois at Urbana-Champaign.

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