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What BuzzFeed Can Teach Facebook

NEW YORK ( Real Money) -- There's a lot of hate out there these days for Facebook (FB), in the wake of its botched IPO. However, although the company has challenges ahead of it, it would be silly to discount its strengths as much as it would be to discount its risks.

I've spent a lot of time discussing Facebook's risks in areas such as mobile, but I want to talk about what it might be able to do with ads.

Last Friday, BuzzFeed President Jon Steinberg was interviewed on CNBC about the future of online advertising. If you missed it, the interview is here.

BuzzFeed is a fascinating company that exemplifies what we expect from and how we interact with news in our new mobile world. The company could provide some useful insights into where Facebook is heading as a company and as a stock.

BuzzFeed is basically brought to you by the same team that put together the Huffington Post. In my view, what made the Huffington Post magical wasn't Arianna Huffington -- although she certainly was and still is a great asset -- but the team behind it that helped define a new news genre. Ken Lerer and Lerer Ventures were the key backers of both Huffington Post and BuzzFeed. Jonah Peretti was a co-founder of both. Paul Berry was the CTO of HuffPo, and now he has joined another Lerer Ventures-backed venture.

When you go to BuzzFeed, you notice lots of juicy headlines and provocative photos. The site has also done a good job at maximizing the real estate on the screen. HuffPo's abundance of white space seems antiquated in comparison.

Where you really notice the difference is in how well BuzzFeed does at the mobile experience of the site. I can't think of a better mobile news app right now. BuzzFeed completely understands the importance of social media from the perspective of gaining and generating traffic. BuzzFeed makes it so easy to share its content with others in a humorous and fun way. It also tailors its content to be optimized for a mobile site.

BuzzFeed's Steinberg is quoted often as saying that the site gets double the traffic from Facebook that it gets from Google. This makes perfect sense, given how the site has set itself up.

What's also very interesting about BuzzFeed is what it is doing with ads. It is basically pioneering what "Sponsored Stories" could be by Facebook -- if Facebook gets its act together.

BuzzFeed's approach is to make everything look like a story, even the ads. Lose all display ads, because they don't work in a mobile world. The ads are always shaded in yellow on the site, so Steinberg claims it's clear to users when they are ads. However, BuzzFeed is incredibly smart about writing the copy for these ads. There's often very little tie-in to the actual ad sponsor. It just seems like another BuzzFeed cute-kitten story that just happens to be shaded yellow.

Probably because of this, Steinberg says these sponsored-story ads do much better than other display ads: He says to think about a click-through rate of 2% rather than 0.10%.

That is a huge difference. And Facebook definitely needs to emulate BuzzFeed in terms how smartly it writes these ads. There are definitely some interesting possibilities in this new medium of ads, and BuzzFeed deserves credit for being the one to go out there and show the world how it's done.

But there are a few caveats. I don't know, but I'd imagine the best-performing "ads" are the ones that look the least like an ad and most like real news. That might make these ads look great the first time through the batting order. However, are the advertisers going to be happy with the results? Will users remember Stoli vodka after looking at the 11 best beaches in the world, with a subtle text message at the start of the slide show to pour themselves a drink? Not sure, but I'm skeptical.

Therefore, click-through rates can't be the be-all and end-all here. And advertisers know that. My guess is that they won't monetize as high. The opportunity is still there to figure out how to capture buying intent in a mobile context and then make money off that.

However, kudos to the BuzzFeed folks for what they're doing.

At the time of publication, Jackson had no positions in stocks mentioned.

Eric Jackson is founder and Managing Member of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. In January 2007, Jackson started the world's first Internet-based campaign to increase shareholder value at Yahoo!, leading to a change in CEOs in 2007. He also spoke out in favor of Yahoo!'s accepting Microsoft's buyout offer in 2008. Global Proxy Watch named Jackson as one of its 10 "Stars" who positively influenced international corporate governance and shareowner value in 2007.

Prior to founding Ironfire Capital, Jackson was President and CEO of Jackson Leadership Systems, Inc., a leadership, strategy, and governance consulting firm. He completed his Ph.D. in the Management Department at the Columbia University Graduate School of Business in New York, with a specialization in Strategic Management and Corporate Governance, and holds a B.A. from McGill University.

He was previously Vice President of Strategy and Business Development at VoiceGenie Technologies, a software firm now owned by Alcatel-Lucent. In 2004, Jackson founded the Young Patrons' Circle at the Royal Ontario Museum in Toronto, which is now the second-largest social and philanthropic group of its kind in North America, raising $500,000 annually for the museum. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson.

You can contact Eric by emailing him at eric.jackson@thestreet.com.

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