Further confirmation that marketing is the new finance comes from today’s news that Microsoft has paid US$240 million for a 1.6% ownership of Facebook. That puts the total value of Facebook at US$15 billion, which is a suitably impressive and large number. As the news article I linked explains, it’s all about marketing. Facebook is collecting loads of data about people, their preferences, their friends’ preferences, and so on. This is valuable stuff for marketers. As a tiny example, you can put in your Facebook profile a list of your favourite movies. So can your friends. Facebook knows your favourite movies, your friends’ favourite movies, and who your friends are. Assuming that you and your friends have similar tastes, they can use this data to target ads to you for movies that you might like but may not have seen.

This is valuable because the big problem about marketing is randomness. Different people have different tastes, and ads are more valuable if they give people information that is relevant to them. The old approach to this problem was ’shock and awe’ tactics, ie, widespread mass-media advertising. The trouble with this is that it’s inefficient — you pay for delivering ads to a lot of people who aren’t interested in what you’re advertising. If you can use some information to target those ads to people who are interested (’surgical strikes’, to continue the military analogy), then you’ll achieve a similar result by spending less money (less ‘collateral damage’ …). In economic terms, it’s a more efficient production process for advertising.

Of course the 15 billion dollar question is exactly how to do this. As always, the devil is in the details. How do you take that mass of information collected by Facebook and process it and use it to decide to show ad X to customer A but not customer B? The more effectively you can solve this problem, the more valuable your algorithm for targeting ads will be and the more profit your company will make. If I were Facebook, I would be employing lots of smart people to work on this kind of matching and information processing problem. If I were smart enough, I’d start my own company to work on these problems and develop customised advertising targeting algorithms myself.

This video gives some insight into the sophisticated mathematics and algorithms that can be used to attack this kind of problem. (Warning: extremely high nerd factor, but worth watching if only because complicated math problems sound so cool when explained in slightly broken english by a guy with a Russian accent).