But I’ve seen examples of other advertisers, both large and small, increasing their spend on this platform. The main reason? The low cost of inventory coupled with useful targeting options produces can in many cases very good campaign ROI. Most of these advertisers don’t buy traditional display ads, though some also spend on paid search. In fairness, most of these advertisers have a direct response model with online fulfillment (i.e. join a website, install a FB app, or complete an e-commerce transaction).

What’s striking to me are the similarities between this platform today and Google in 2001-2003. I’m not necessarily predicting that FB is going to grow to tens of billions of revenue or hundreds of billions in mkt cap in the next five years. But back then search advertising was not only a new paradigm, but more importantly produced good ROI for early adopters (also direct response, by and large) because it was so cheap.

Yes, it wasn’t low cost alone. The measurability and targeting enabled by Google’s model of sponsored keywords sold on a CPC basis made it easy for direct marketers to determine ROI and continuously improve it. Back in 2002-2003 the cost per click for most keywords was pennies, not dimes, quarters, or dollars. But over time, as the search advertising industry matured, the magnitude of the initial opportunity provided by this cheap advertising has diminished.

These early adopter advertisers captured some of the value initially. Google has captured (or recaptured, depending on your POV) a large portion of this value simply by algorithmically improving yield through a combination of higher per click pricing, reordering ad display based on click-thru rate, and all the other innovative tricks they’ve developed.

In addition, a number of derivative companies emerged with an explicit arbitrage model of taking this low cost advertising and making it more valuable. I don’t just mean the countless mom & pop SEM firms around the world, many of whom basically are in the business of making search advertising understandable to companies who previously never advertised or never did so online. But companies like Quinstreet (whom I identified as a potential public company back in May and which filed to go public last wk), Vantage Media, Efficient Frontier, ReachLocal, and others have all built very large (Quinstreet’s >$300M revenue) businesses based on some form of search advertising arbitrage. In some cases this is simply aggregating demand from many small advertisers and in others it’s buying CPC ads and turning them into higher value leads or acquired customers.

As Google’s become more effective at extracting the maximum dollars from search advertisers, I’ve seen companies conscientiously stop the growth of paid search spend in favor of other channels. Overall Google’s still growing by leaps and bounds of course, but some advertisers are now reaching that point where an additional $1 of paid search is only marginally profitable. Clearly the days of cheap search ad inventory, at least for most keyword categories, are behind us.

When will Facebook reach that point? It’s probably years away, but is it 3yrs, 5yrs, beyond? Will companies like Buddy Media, SocialMedia Networks, et al build big businesses on top of the Facebook marketing ecosystem, in the way several have in paid search? FB obviously has massive amounts of inventory and still only a small number of marketers (compared to Google) spending on their ad platform. And there’s also lots of other ways marketers can engage on Facebook (groups, fan pages / profiles, apps) besides just ad buys. But it will be interesting to see how the ad platform grows, and whether today’s very low cost remains an arbitrage opportunity for very long.