Ad network Social Media has been making some money with third-party applications on Facebook since around the time of the social network’s developer platform launch last May, but now things are starting to get better.
The Palo Alto and Mill Valley, Calif.-based company runs ads on these applications, and splits revenue with developers. It raised a venture round of funding from Charles River Ventures last fall. Now, it is starting to see more clients coming in, including large advertisers and their advertising budgets.

I recently sat down with Social Media co-founder and chief executive Seth Goldstein, to hear more about the company’s progress.

VentureBeat: So how valuable do you think advertising will be on social networks in 2008.

Seth Goldstein: Right now, everyone’s still experimenting. There’s lots of noise. Reporting metrics are all over the place.

I think advertising in social media will be distinguished by a focus on making ads as socially engaged as apps themselves. It’s a question of how to turn ads into endorsement opportunities.

Facebook itself is doing good experiments on social ads, like where you’ll see a picture of people who have installed an app. That’s the direction ads on social networks will take. It’s a question of how to turn ads into endorsement opp.

I’d say that in this next year there’s a $50 million market opportunity — besides what Facebook itself is doing. You’ll see a lot of it backloaded later in the year, like around November and December. Starting in September, you’ll see a lot of people’s hard work now pay off in the form of ad insertion orders and bigger ad budgets.

The entertainment industry may be a big provider — maybe 30-40 percent of the market. Travel ads will make a lot of sense, same with apparel brands, lifestyle brands, cosmetic brands, deodorant. Basically, any brand that wants to reach a younger audience, and isn’t relying on big, considered purchases. Other advertisers, like car manufacturers and financial services, might take longer to get on board.

VB: Social Media has been up and running since the launch of Facebook’s developer platform last May. What are some of the changes you’ve seen in advertising on Facebook?

SG: The evolution started with cost-per-install advertising last summer, where one app would include an ad for another app. [Note: If the ad resulted in the advertising app getting installed by a user, the app that ran the ad would get paid — critics have called this a pyramid scheme]. Some of these ads were kinda legit, like the Microsoft Office “poke,” where companies could use one of the “poking” apps to sell branded pokes. Lots of people got business there.

November saw the first substantial money from lead generation — millions of dollars in total. Of course, you already see this working on the web all the time, with things like ads for free iPod giveaways in exchange for users filling out a survey. On Facebook, you saw it in areas like online education, dating, wireless services.

Now, the more progressive brands and agencies are starting to get much more focused on advertising on social networks. They’ve realized its not going a way — there was a time when people thought that social networks were just fads, but they’re not.

VB: What’s different about Social Media from other companies that sell advertising and provide data for applications on Facebook and other social networks?

SG: We’re the only network that works exclusively for independent developers. We don’t have our own apps [as opposed to companies like Slide, RockYou, Zynga and SGN, that have their own apps but also sell ads for third-parties].

Lets say you’re a company with both your own apps and you’re selling ads for others, and you get a big deal from Nissan. Where do you put it? Do you run the ad in your own apps first? I think there’s a structural conflict — although these are not bad businesses. I mean, in some sense Google has to manage this problem, as it provides ads on its own site and on other sites with Adsense.