The World: Facebook is entering its difficult second phase

The social networking site is working out how advertising can best deliver the commercial firepower it needs.

Things haven't all been going Facebook's way in recent months. Like a rock band struggling with that "difficult second album", the social networking site could be said to be entering its difficult second phase.

It's faced problems with its Beacon service, which, among other things, included an ad-serving feature that raised privacy concerns among users, forcing Facebook to make changes, including making the service "opt in", when it had launched as "opt out".

Then, January UK user figures from Nielsen Online showed a decline for Facebook for the first time since July 2006, from 8.9 million in December to 8.5 million in January. Facebook retaliated with its own tracking, claiming that its user base was as strong as ever. Yet still the commentators seized on the figures as an excuse to suggest that users were showing signs of Facebook fatigue.

The backdrop to this was a deal with Microsoft last October that saw the software giant acquire a tiny 1.6 per cent stake in Facebook for $240 million. This valued the company at $15 billion, and increased scrutiny on a business that was reported to have generated revenues of just $150 million in 2007. Facebook's founder and chief executive, the 23-year-old paper billionaire Mark Zuckerberg, has since tried to bolster the operation with senior hirings, including the chief operating officer, Sheryl Sandberg, formerly the vice-president of online sales at Google.

The message is clear: while Facebook remains a company proudly rooted in technology, it now needs the commercial firepower to boost its revenues. And given that Facebook's 70 million users don't pay for the privilege, these revenues will come almost exclusively from advertisers. The man charged with driving growth is Mike Murphy, the vice-president of global sales at Facebook, a man who has been on board for just over two years and joined the social network from Yahoo! when it had just 4.5 million profiles and was confined to college sites in the US. Murphy was in Venice last month to speak at the Venice Festival of Media, and faced tricky questions over Beacon.

He also looked distinctly uncomfortable when asked whether the widely reported $150 million revenue figure was accurate, but did not refute it. However, he argued that Facebook has a viable model in place to monetise its service, but will do this on its own terms: "I read a lot about our lack of monetisation strategy but the way it works now - with the huge advantage of the Microsoft investment and venture capital - is that we don't make the mistakes of rushing in and trying to monetise users too quickly. We care about users, and their experience, a lot. We don't want to be forced into an old and, in my opinion, a broken model of putting banners everywhere on the site."

Speaking later to Campaign, Murphy talked in more detail about Facebook's commercial ambitions. He heads a team of just 75 around the world, so it's a lean commercial operation. That said, Facebook employs just 590 people in total, most of them technology experts. Murphy is based at Facebook's HQ in Palo Alto, California, but last year he hired his former Yahoo! colleague Blake Chandlee to build its commercial operations outside the US from London.

The approach of this central Facebook team is upstream (Microsoft sells basic advertising on the Facebook site). Murphy says: "We tend to focus on the biggest brands in the market - seeing that we don't have hundreds of salespeople around the world we're really focusing on the brands that are already leaning towards social networking." The aim is to establish more of a permanent presence for advertisers on Facebook, beyond one off promotional activity. And Facebook is growing its international reach: it already has French-, Swedish- and German-language sites, and is working on building versions in 21 other languages. It claims its current great success is France, where it has swiftly built two million users and is growing significantly each month.

But are Murphy and his team worried that Facebook is a fading fad, that something else will come along and steal its thunder? He argues that it is doing everything possible to guard against this. Facebook is more of an open platform now, and since last year has allowed users and advertisers to design their own widgets to support it.

Murphy believes that this will sustain growth against more niche sites that are springing up: "This is a great opportunity for instant distribution to a significant audience. People leave because they get bored, but we have over 20,000 applications and provide something new every day."

Regarding its advertising strategy, Murphy argues that Facebook plays the role of educator and evangelist for social networking as a whole, and attempts to build relationships based on trust with advertisers. If it won't work for one of the parties, it will walk away.

He remains cagey on the details, however: "It would be really easy to slap banners all over the site and monetise things very quickly, but that would be at a cost to our users. We are being patient and building the right model - we're really happy with the growth trajectory."

Facebook will always have its doubters, but for now is enjoying the challenge of designing an online future beyond the pay-per-click model.

Whether this proves to be worth $15 billion is another matter.