Will Facebook’s Ad Exchange Be Profitable?

In a move to make Facebook’s (NASDAQ:FB) advertising strategy less inept, the company announced a new service, christened Facebook Ad Exchange, that will allow advertisers to bid in real time for available ad space.

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Questions have been multiplying since the social network’s disastrous IPO of whether the company could ever generate effective advertising revenue like its rivals, Google (NASDAQ:GOOG) and Yahoo (NASDAQ:YHOO). Attracting more advertisers is critical since Facebook shares dropped 45 percent following its initial offering. As it now stands, Facebook’s strategy prompts only one in five of its nearly one billion users to click on an advertisement.

It has taken Facebook a relatively long time to explore the option of real-time bidding. Of the projected $18.9 billion that will be spent on U.S. online display advertisements in 2015, research firm IDC predicts that real-time bidding will account for about $5.08 billion, or 27 percent. Last year, real-time bids generated $1.07 billion.

The Facebook Ad Exchange, FBX, will enable advertisers to target Facebook users based on their browsing history, a move the company hopes will lure advertisers from Google’s real-time bidding service. The advertisements will be displayed once a user’s browsing history matches a marketer’s profile. Users of the social network will have no option to turn off this function.

According to Pivotal Research Group analyst Brian Wieser, FBX could capture a fifth of the market by next year and generate $1 billion in sales.

News of the approaching changes to Facebook’s advertising format was met with optimism on Wall Street. Shares of the California-based social network closed up 6.21 percent at $22 per share on Friday.

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