In a subtle yet significant upgrade, Facebook has quietly enabled application developers to begin granting access to Facebook advertising accounts which wish to target ads toward their users. In other words, Zynga, the developers of FarmVille, could grant someone from Coca-Cola access to the Facebook-owned advertising space which resides next to the application (as pictured below), or elsewhere on the site. So what does this mean for developers, brands, and ad networks? I’ll explain below.

The Economics Of App-Targeted Facebook Ads

This new option to target users of applications when granted access by the application owner should spawn a fair amount of speculation about Facebook’s intentions, however before jumping into the possibilities, I want to quickly review who’s participating in this process. Here are the participants: the developer (who owns the application), Facebook (who owns the real-estate that the ads are placed on and power the ad network), and the advertiser (who pays to have the advertisements placed there).

At the most basic level, a developer generates no revenue when an advertiser places an advertisement through Facebook’s ad platform. Instead, all revenue goes directly to Facebook. However as any developer knows, those ads are valuable real estate. They have the ability to drive users away from an application. On a small scale, the impact is minimal, however for large developers, one can assume that these ads affect two things: revenue potential and user engagement.

Options For Developers

This new feature, which enables developers to add “approved” advertisers (as pictured below) will present a number of options. The first, and most obvious option is for developers to purchase their own inventory. Why show someone else’s advertisements when you can show your own? However, it’s not guaranteed that a user of a specific application will be viewing that application while navigating Facebook. This inventory can then be used multiple ways, the two most obvious of which are: cross-promoting the company’s own games, replacing the existing cross promotion widget that is at the top of all popular games, and secondly, to resell this inventory to others.

Options For Ad Networks & Ad Platforms

So if you’re an ad network that sells advertisements within applications, what should you be doing? The most obvious thing is to partner with application developers to sell this ad space on behalf of the developer and give them a cut of the margin. This would operate as follows: Ad Network X builds an application on top of the Facebook Ads API that automatically targets a developer’s applications. This inventory will then be purchased by the ad network and then resold to others.

Now thanks to your spiffy new Facebook Ads API interface you can go take a trip to the Bahamas! Congrats!

Facebook’s Cut

The most obvious kink in the whole equation is Facebook’s cut, which is going to be significant. Not only does Facebook get to fill a developer’s remnant inventory by default, but they’ll also be taking money from every ad that is purchased by a third-party on the application. Granted, the application developer controls a little over 80 percent of the real-estate within an application’s canvas page, however Facebook owns close to 20 percent of the real-estate, and that’s pretty valuable.

For small developers, this real-estate is negligible, however large application developers will see a reason to begin purchasing their own Facebook-owed ad inventory and resell them to others, or buy it themselves.