Facebook prepares for news feed ads, but lawsuit looms

Facebook plans to introduce ads in 2012 to the main news feed of the social network, according to reports.

An example leaked to TechCrunch of what a news feed ad would look like on Facebook.

At first, Facebook ads had been contained to the right sidebar. A few months ago they were added to the “activity stream” of everything your friends are doing. The ads will appear by January in the main news feed of the website, TechCrunch reports, and Bloomberg says by March the ads could appear in the mobile version.

However, it seems Facebook’s plans could be upset by a legal challenge to one of its most successful ad strategies. A class action lawsuit claims Facebook’s social ads called “sponsored stories” violate a California law against using someone’s name or likeness commercially without permission. The Wall Street Journal explains further:

The lawsuit is over a type of social ad called a “Sponsored Story,” which is created when a Facebook user “likes” a product or service and is shown to that user’s friends. In other words, if you “like” a brand, you become a spokesman for it.

It seems to be working as an ad strategy. According to Facebook, members are twice as likely to remember seeing a Sponsored Story advertisement compared to an ordinary advertisement and three times as likely to purchase the advertised service or product. But is it legal?

The biggest implication for news media companies is that Facebook’s ad expansion would gobble up even more of the digital advertising pie that news publishers are competing for online.

One analyst estimates Facebook “will report 2011 display [ad] revenues at about $3.5 billion, and can expect those to rise to about $5.3 billion in 2012.” I believe Facebook is also a bigger threat to news publishers’ local advertising base than other Internet ad giants like Google or Yahoo, because Facebook can offer businesses extremely precise ad targeting by ZIP code and demographic.

Earlier: Zuckerberg talks about advertising with Charlie Rose (Forbes.com) | Previous Facebook coverage

We have made it easy to comment on posts, however we require civility and encourage full names to that end (first initial, last name is OK). Please read our guidelines here before commenting.