By Adam Rifkin via Techcrunch.com

Remember three years ago, when Microsoft paid a quarter-billion dollars for 1.6% of Facebook and the exclusive right to run banner ads across Facebook.com? Tell the truth, how many of you thought that was a killer business decision? I can’t say I did at the time. But as that deal is about to expire in 2011, Facebook’s status as a revenue juggernaut is rarely questioned any more.

In fact, I have been mulling over data from both companies, and I’m ready to declare in public my belief that Facebook will be bigger in five years than Google is right now, barring some drastic action or accident. Futhermore, Facebook will grow without needing to cut into Google’s core business of text ads, which are still 99% of Google’s profits. Even if every single Facebook user performs just as many searches with Google as ever—including Google Instant, mobile search, and YouTube—Facebook will inexorably grow as big as Google is today and maybe bigger, because Madison Avenue’s brands are less interested in targeting than they are in broadcasting to vast mother-loving buckets of demographically correct eyeballs, and Facebook has become the perfect platform for that. What do I mean by bigger? Facebook already has more page views than Google. People already spend more time spent on Facebook than Google. I’m referring to the life blood of any business: revenues.

Google’s 2010 revenues will be $28 billion, give or take a billion. The goal of this writeup is to illustrate the ways that Facebook’s annual revenues could grow from $2 billion to more than $30 billion in five years a diverse set of revenue streams that have one thing in common: people. Facebook’s future revenue streams, like their applications, are naturally social, and engage consumers with social intent, not just a widget or “social layer.” We repeat: social is not a layer you add; it is core to monetization.

Facebook has figured out its business model, and wants to keep it out of the public eye as long as possible. Facebook’s alleged revenue has grown from $275 million in 2008 to $635 million in 2009 to a rumored $2
billion this year, which is much higher than the also-impressive $1.2 billion number circulating earlier this year. Let’s pause and reflect for a moment. Facebook is allegedly already earning double the revenues Google reported when it filed to go public. When we do the archaeological dig of Google’s actual revenues during its private years, we discover similar pattern to Facebook’s: $86 million in 2001, $440 million in 2002, and $1.4 billion in 2003 . . . and so on. Note, however, this divergence:  Google Web Sites earned more than twice the revenue in 2009 as the gross evenue brought in through Google Network Web Sites, even though in 2004 they were roughly the same. The value of properties Google owns has been much greater and faster growing than all of the external Web sites with whom Google shares revenue. This will almost certainly be even more true of Facebook, given the private nature of much of its content. For many consumers, Facebook is the Web.

Facebook’s second-mover advantage affords the company the luxury of offering both types of Internet money-making product: Advertising and Commerce.  As a result, instead of an open Web-like ecosystem, Facebook could choose to partner with a few friends—Microsoft, Amazon, Zynga, perhaps even Apple—and also lock out Google and anyone else, big or small, who Facebook deems not a friend, to best serve its revenue goals. So, how does Facebook ride Advertising and Commerce into a future of more revenues than Google? By creating a virtuous cycle of cross-promotion: targeted lead-generations and subsequent transactions feed into the next series of even-better-targeted lead-generations and subsequent transactions, naturally.

Facebook Advertising does not directly compete with the text advertisements of Google’s AdWords and AdSense. Instead Facebook is siphoning from Madison Avenue TV ad spend dollars. Television advertising represented $60 billion in 2009, or roughly one out of every two dollars spent on advertising in the U.S.; the main challenge marketers have with the Internet till recently has been that there aren’t too many places where they can reach almost everybody with one single ad spend. Facebook fixes that problem. Specifically, Sheryl Sandberg went on record in August saying that some brands have increased their spending twentyfold in the past year:

Two years ago the big brands were experimenting with us.  They started buying with us a year ago. Now, they’re going big.

She took this observation even further in a recent BusinessWeek article, “Facebook Sells Your Friends“:

Davide Grasso, Nike’s chief marketing officer, says Facebook “is the equivalent for us to what TV was for marketers back in the 1960s. It’s an integral part of what we do now.”

In 2008 [Sheryl Sandberg] left Google for the experience of running a startup—and because she believed Facebook was the better bet to win in brand advertising, which accounts for 90 percent of the $600 billion ad market. “We are in a much bigger market than Google, and we have much, much more runway,” says Sandberg.

She’s not the only one who believes how huge this market opportunity is. Just in the last week, TechCrunc quoted Paul Buchheit in his belief that people are significantly undervaluing Facebook compared with Google, and interviewed Peter Thiel about his conviction that Facebook is undervalued at $30 billion. Of course, these are all self-interested insiders.  I scratched my head at this week’s declarations of undervaluation, until I took the perspective of Mad Men. Facebook Ads employ demographic characteristics (Age/ Sex / Location and Interests), which corporate brand managers and television ad buyers have been accustomed to purchasing for half a century. By contrast, Google AdWords target on the intent revealed by search queries, a practice that has seemed odd and new to Madison Avenue for the past decade and frankly has many of them worried for their jobs. But it’s not just Madison Avenue. I keep thinking about putting BusinessWeek’s $600 billion ad market in context; Google seems to be having as hard a time getting into brand advertising as Microsoft had getting into search. By contrast, Facebook is making this look easy. Yahoo just paid $1 per like, and buying fans is only going to get more expensive as the lifetime value of a “fan” is better understood. Five years from now, could enough brand managers and television ad buyers be so impressed with their returns from Facebook campaigns that they collectively increase their spending on Facebook fivefold to $10 billion annually? Heck yes, even if that entire budget comes out of the current $60+ billion annual TV ad budget (and remember, that is just in the U.S.).  Especially if the entire budget comes out of that, because Facebook is more targeted, has better analytics, and engages its audience directly and interactively through conversations—aka chat and photos.

Plus, Facebook is getting stronger at developing products for advertisers, and once they set their mind on adding algorithmic search and/or an AdWords or AdSense competitor, I’m sure some of the over 100 ex-Google engineers who are now at Facebook will volunteer for the job. Could that also represent a multi-billion dollar advertising stream by siphoning some market share from Google for searches placed within Facebook? Perhaps, though I note again that they don’t even have to go there to reach $30 billion in annual revenues. Five years from now, billions of dollars of advertising will be spent to direct consumers from one part of Facebook . . . to another part of Facebook, where we’ll be offered real items to buy for ourselves or others (birthday alarm, anyone?), premium services to subscribe to, virtual goods to procure and play with, and deals-of-the-moment available for immediate purchase (or we’ll miss out forever!). This is where the manyfold revenue streams of Facebook Credits become apparent, and they all have in common this observation: if you give Facebook users a few free Credits with the block of Credits they buy (at Target, online, and soon anywhere), they will spend all of those Credits and then want to purchase more. Rather than a straightforward discount, the new math of Facebook Credits means that consumers will never quite be sure if they’re getting a discount or cash back or more for less. Kind of like frequent flier miles where we’re never quite sure what the conversion rate is. Or eBay auctions where we “win” the ability to spend money.

Facebook Credits are poised to be this generation’s American Express: an “affordable luxury” lifestyle brand and credit card with reward programs, frequent flier miles, and other incentives built right in so that the more you use it, the more you earn.  ”Facebook Platinum”, anyone? I would have thought they’d need a better brand name than “Facebook Credits” but then again, I would have thought they’d need a better brand name than “Facebook”. Off the top of my head I can think of five potential billion-dollar revenue streams that dovetail into Facebook Credits—Games, Groupon/Pages & Places, Amazon/Commerce, Inbox, and Photos—and if you really pushed me I could probably think of more, like Banking.  (Remember when Peter Thiel thought part of PayPal’s business model was to capture the float? Well, guess who’s bringing sexyback…)

Games. Facebook is running the real mafia wars, taking 30% while letting the game developers do the heavy lifting. (Hello, Disney, EA, and Zynga!).  Can worldwide virtual goods and other in-game payments represent $10 billion annually floating through Facebook in 5 years? You betcha; more so if “social gambling” Zynga-style becomes more en vogue (that is: legal authorities say it’s okay). Facebook’s 30% cut of that? A cool $3 billion.

Groupon / Pages and Places. This one’s simple: Facebook should just copy 2010′s Flavor of the Year, Groupon, and make it self-service for every Facebook Page and Facebook Place.  Early bird got the worm; Facebook will get the gold. (All that glitters is not Gilt.) Imagine if any Facebook Page or Facebook Place could make Groupon-like deals with its fans any time it wants. Now there would be an actual reason to pay Facebook money for ads that can augment the fan base of a Page or Place! Holy carp, Batman, they’ve been teaching us to fish all along:  Suddenly consumers have a reason to LIKE Facebook Pages and Facebook Places!! LIKE something, get a deal: it’s that simple.  Groupon’s Gap promotion grossed $11 million in a single summer day in 2010; imagine, five years from now, millions of Facebook Pages and Facebook Places offering regular but expiring deals to their fans every single day.  Wild guess: in aggregate an average of $100 million in deals sold every day worldwide, or $36.5 billion of deals sold every year. At a 30% cut that’s a solid $10 billion straight into Facebook’s pocket per year. In the words of Keanu Reeves, Whoa.

Amazon / Commerce. Amazon was so smart to partner with Facebook: my informal survey of 5000 Facebook friends found many of them willing to make their purchases (and share them!) from within Facebook in exchange for extra Credits.  The details remain to be determined for consumer rewards: will it be like Discover (1% cashback on purchases) or like Visa (earn points! get entered in drawings!) or something else entirely? We’ll see.

If Amazon helps Facebook figure out how to make malls-with-walls and consequently make real shopping money, I have no doubt other e-tailers will follow. If PayPal’s 2009 revenue was $2.8 billion with 87 million active accounts, it’s not a stretch to predict that five years from now Facebook too will have 100 million to 150 million active Credits accounts (at least!) bringing in $5 billion in revenue from this business unit alone. Commerce is the grease that accelerates everything, so it seems like it’s just a matter of time before Facebook can acquire PayPal (for its volume, its risk management, and its fraud detection expertise) and fold it in together representing let’s say $12 billion in annual revenue five years from now, creating a true new currency for the world economy.

Inbox. Hotmail Plus, Yahoo! Mail Plus, and Gmail Storage all charge $20/year for premium features. So could Facebook Inbox if it became more mail-like, which is within grasp since Facebooker Paul Buchheit is the creator of Gmail, and he’s highly influential even if he’s not building the new system himself. Bonus points for throwing in an Address Book and Skype-slaying social phone features like Social Voice for free to anyone who purchases Facebook Inbox Pro.  50 million pro accounts at $20/year is a cool $1 billion Inbox product. Nice.

Photos. Fred Wilson may have mocked photos, but they represent big money now that Facebook is by far the world’s largest photo site. And the Facebook Photos product suite is about to be vastly be improved—now with high resolution!—thanks to the addition of the smart, energetic Divvyshot team during Lockdown.  Partners could be literally everyone in this space—Snapfish

Thanks to the massive popularity of Facebook and the addictive appeal of real-time simulation games, gaming on social networks has gained widespread adoption.

According to a BlogHer/iVillage study, about 22 percent of adult U.S. Internet users played casual games daily in March 2010. A study from ThinkEquity estimated that 79 million people will play social games in the U.S. in 2012, up from 47 million in 2009. As the social gaming audience continues to grow, so will revenue from direct and indirect payments and advertising, resulting in more than $720 million, according to ThinkEquity. By 2012, the market is expected to reach $2.18 billion.

U.S. direct-paying users are expected to generate $1.19 billion in revenue by 2012, up from $340 million in 2009. Indirect-paying users -- defined as those who opt-in to advertising offers attached to social games -- will inject $868 million into the industry in 2012, up from $324 million in 2009. Social game advertising revenue will double to $124 million in 2012. "Social gaming represents opportunity for marketers," said Paul Verna, a senior analyst at eMarketer. "In the coming months, expect to see more marketers muscling into the social gaming space through brand marketing tactics such as display ads, video ads, custom games, in-game enhancements, product placements and sponsorships."

As we speculated last week, Twitter is, indeed, experimenting with trending topics as ad space. This is all part of Promoted Tweets, the company’s new ad platform aimed at increasing brands’ interaction with fans — and increasing Twitter’s revenues, too.

These promoted trends are rumored to sell for tens of thousands of dollars. When a user clicks on the trending ad, he is directed to a search results page with the advertiser’s promoted tweet listed at the top. In this case, the promoted trend is from Toy Story, the first customer for trend-related advertising. Some of the promoted tweets for this ad read, “‘To infinity and beyond’! Toy Story 3 hits theaters Friday, June 18. Did you get your tickets yet?” and “Exclusive clip for our Tweeps! DJ Pogo presents a remix of the original classic before Toy Story 3 is out on 6/18.” Both contain links as calls to action, of course.

Here’s what the ads look like in action:

Of course, Twitter COO Dick Costolo insists these promoted tweets aren’t ads. But after checking out these tweets and their content, including links, an ad by any other name still smells like an ad to us.

Now that many corporations have mastered the tricky art of signing up for a Twitter or Facebook account, the next step is leveraging social media tools in a meaningful way that impacts your brand and your bottom line. While some have found varying degrees of success, the vast majority could use a crash course stat.

That deficiency has given rise to conferences like Smash Summit, held on Wednesday at the InterContinental Hotel in San Francisco, where representatives of Twitter, Facebook, Salesforce, Google and others offered social media tactics for businesses (Techcrunch was a media partner). The keynote speaker, Jeremiah Owyang, a Partner of the Altimeter Group, offered four laws of social business: don’t fondle the hammer (don’t focus on the specific tools, think about your broader marketing agenda), live the 80% rule (get your company ready for social media, that’s “80% of success”), customers don’t care what department you’re in, and real time is not fast enough. You can access Owyang’s presentation, along with all the other Smash presentations, here.

Although far from perfect in their social media efforts, Virgin America, Comcast and Cisco have all employed parts of Owyang’s rules. They were also (relatively speaking) early movers on blogs, Twitter and Facebook. For example, Comcast’s Senior Director of National Customer Operations, Frank Eliason started using his Twitter account in early 2008 to find customer complaints and interact with disgruntled users.  We spoke with Eliason, Virgin America’s Bowen Payson (Manager of Online & Digital Marketing), and Cisco’s LaSandra Brill (Senior Manager, Global Social Media), after their panel on “The Brand & Enterprise Story: ‘Who’s Changing The Channel.’” Each of course represents a very different sector, but there were several shared threads (see video above):

1. Expansion

These companies are increasing the number of employees dedicated to social media. Cisco’s Brill currently manages a team of 7, she predicts that will rise to 20 to 30 by 2011. Comcast’s Eliason says he’s adding two more to his ten-person staff this year. The rising headcount naturally reflects the companies’ growing online initiatives— Cisco already has 25 blogs and more than 100 Twitter accounts (sometimes there is such a thing as too much of a good thing).

2. Identity

Within corporations, social media is also breaking out of its silo. Companies may be building out specialized teams for social media, but many are also encouraging other employees to use social CRM tools and to become active external agents. For the last few years we’ve been focused on how companies should push out their content and interact with the market, the less apparent power of social media is how it will disrupt the mechanics of business. Eliason says that it has the potential to completely restructure companies, flatten organizations, and democratize the workplace: “We’re going to see a real big shift with employees, whether it be employees talking externally or even talking internally…it’s going to be a new way of having a little bit more power than they did before. And so companies are going to have to figure out a whole new game plan and change their culture…Companies are going to be a smaller place.” Eliason’s boss, Comcast CEO Brian Roberts has also acknowledged the power of Twitter, saying in late 2009 that it has “changed the culture of our company.”

The expansion of social media also has the power to reshape the very guts of a company: its brand identity. According to Brill, Cisco’s social media initiative has softened the company’s image, making it less formal and more human (a nice complement to the company’s “human network” campaign). “We basically have to relearn how we do things, how we communicate, and it’s no longer the polished marketing brochure, the polished website— conversations are happening,” she says. Of course with that power comes risk— the increase in dialogue and brand ambassadors reduces the control a company has over its message. Cisco’s solution was to accept that risk and try to minimize it by education and offering a “social media certification program” to all employees.

3. Stay Focused On Your Business Objectives

This is related to Owyang’s first (oddly phrased) rule, “don’t fondle the hammer.” The executives warned that companies shouldn’t be caught up in specific platforms or rough metrics. Everything should be done in the context of your businesses’ objectives and broader strategy. For example, when it comes to return on investment, Eliason says “The real approach to ROI in this space, is to get all these groups together, PR, marketing, HR IT, and talk through what’s important to you. So we get huge return on investment when we listen to these things and then we act or fix things because we’re listening. The dollars are huge. You could have a 30 minute event that pays for my team for well over a year.”  Meanwhile, Virgin America’s Payson says a flexible model will help you meet your objectives and stay responsive, he balances flexibility with structure by working in three-month cycles. The team plans for developments and initiatives on a three-month time line, but will constantly readjust according to buzz activity and user feedback.

4. Facebook, It’s Complicated

I couldn’t let them go without a parting question on Facebook. Conclusion (not a big surprise): it’s complicated. The companies were all grateful for the platform, but they also highlighted some serious concerns. Brill was upset by the company’s recent launch of Community Pages, which are pseudo-Wiki pages regulated by the Facebook community. She says a page on Cisco was frequently confused with the company’s official profile: “I’m surprised that they would even do something like this without consulting the brands…It looked a lot like our corporate fan page and I think it’s hard for the users to determine what’s official and what Facebook created.”  Virgin’s Payson was more upset by what he described as a lack of transparency, calling on Facebook to follow Twitter’s lead and give companies more access to analytical tools/data.