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I had coffee yesterday with my good friend Willem who was taking a break from Facebook’s F8 Developer’s Conference.  What’s the latest Facebook news I asked? Well, it turns out, its the concept of an “open graph.”  Basically, that’s fancy tech language for integrating Facebook into millions of Web sites and vice versa. Here’s how it works, according to an article from eWeek:

Specifically, when a user clicks a Facebook Like button on a Website enabled by the Open Graph Protocol, the publisher will gain a link from the user’s profile, the ability to publish to the user’s News Feed, inclusion in search on Facebook and analytics.

Facebook partners for the Open Graph that feature the Like buttons will push to Facebook information about items their visitors liked—for example, bands that users liked from Pandora, local businesses such as restaurants from Yelp and movies from IMDB.com. Information about objects users click on will appear in users’ profiles as items they endorse.

OK, cool you say, I can easily let my friends know how much I love a restaurant or a movie via Facebook. Great, but what does that have to do with Google and specifically Google’s AdSense product that basically funds millions of Web sites across the universe?

Well, there are three things that are important here. First, sending info from the Web into Facebook reduces the need to actually leave Facebook and surf the Web, so this accumulation of data could, over time, change user behavior to spending more time on Facebook and less on the rest of the Web. Why go to Yelp if you can see Yelp results on Facebook? Obviously, Yelp believes that there will be return-traffic, or else they wouldn’t agree to integrating so closely with Facebook, but I’m not convinced that this won’t result in a net decrease of traffic to Facebook partners. But let’s not dwell on this point, because it is the least important of the three points I want to make.

Point #2: Facebook’s increasing integration with other Web sites reduces the need to search for information through a search engine like Google. Getting recommendations from peers for restaurants, books, movies, hotels, etc right through Facebook is a more trusted way to ‘research’ a purchase than to simply do a search on Google and hope that either Google’s natural search algorithm or sponsored results will lead you down the right path. This was the concept between the failed launch of Facebook’s Beacon platform, and is basically the concept between Blippy, a “social shopping” site where you can see what your friends are buying. Beacon’s problem was two-fold – there wasn’t a clear opt-in policy and it was too crass of an attempt by Facebook to make money off users’ shopping behavior. This “open graph” however, doesn’t directly monetize users (yet) – it makes money off the advertising that results from increased Facebook page views. Additionally, there is no need for an opt-in because users are voluntarily uploading information to Facebook. Over time, Facebook will capture a large amount of “likes” and positive reviews of many products from your peer-set. This could eventually become a searchable comparison shopping engine of sorts, but rather than results being dictated by advertisers, the results are dictated by the recommendations of your peers. As users share more and more content from across the Web inside Facebook, the value of searching for products and services via search or via comparison shopping engines decreases.

But point #3 is the one that I find most interesting. As Web sites and Facebook become more and more intertwined, this opens the door for Facebook to use users’ behavioral, demographic, and geographic data to serve highly relevant ads to users off Facebook. Right now, the best solution for millions of Web sites is AdSense, which basically looks for semantic relevance within the contents of a Web page to serve up relevant ads (for example, if there’s an article about luggage, AdSense might serve up a Samsonite ad). Semantic relevance works pretty well, but most advertisers would probably pay more for behavioral targeting (BT), or better yet BT combined with semantic targeting. Google has attempted to apply some BT to their AdSense network (remarketing and interest-based advertising being two examples), but as I’ve noted in the past, Facebook is really one of a few places on the Web where users are almost 100% completely honest about themselves. Google doesn’t have this sort of accurate data, so it stands to reason that Facebook’s targeting will out-target any algorithmic results Google can generate.

A columnist in AdAge summed this point up quite nicely:

Imagine visiting Pandora and it already knows how to program your station. Or visiting CNN and having it know what kind of news to display for you. As a consumer, there are potentially many benefits of the initiative, making many experiences you have more and more relevant the more interactions you perform.

In order to make all of this happen, a significant amount of non-personally identifiable data will be collected from consumers and made available to approved developers and publishers (75 at launch). As you might imagine, there will probably be some backlash from people concerned about privacy (heck, people made a fuss over the Census). But the promise here is that your experience on the web will be better thanks to Facebook and its delivery of more customized, relevant content.

. . .

It seems to be an inevitability that all of this intelligence will one day be applied to power a socially targeted ad network as big (or bigger than) Google’s AdSense. It would be a network that would theoretically deliver even better results for advertisers, resulting in higher CPMs/CPCs/CP-whatevers that can deliver higher payouts to publishers, making a choice between the two platforms a not-too-difficult one for those publishers.

Competitors to AdSense have failed miserably in the past, largely because they haven’t been able to create a critical mass of advertisers and publishers to push profits higher for publishers to switch and volume high enough for advertisers to care (the classic chicken and the egg scenario). Facebook has – or will soon have – a critical mass of advertisers on the Facebook advertising platform. Combining this pool of money with better targeting for publishers around the Web may be the magic combination that out-monetizes AdSense. That’s a serious problem for Google.