F8 is Facebook’s annual conference where application developers and Facebook employees mingle, while learning about the lastest goals and the future of the #1 social network in the world. This year, preparation and leaks seem to be in full swing as we see several changes to Facebook’s privacy guidelines. Previous major announcements have been tied to the internal workings of Facebook but this year is looking to be very different.

I’ve been noticing Facebook’s need to expand their advertising model and I think they’re now looking at a prime opportunity. Facebook has something that Google will never have that makes them incredibly valuable: demographic indexing. Demographic indexing picks up where Google left off with Adwords. Adwords allows advertisers to target customers by geographic region and keywords. Both pieces of information allow for instantaneous semi-relevant advertising on any of Google’s products (Search, Gmail, Calendar, etc.) or keywords on publisher’s websites (blogs, news portals) by embedding a tiny snippet of code to index what is on the page.

Facebook’s advertising system contains all the components of Adwords on their internal pages (Facebook.com) but adds a layer of targetable information for advertisers: demographics and interests. By filling out a full profile, the Facebook user is giving information that allows advertisers to target them using Facebook’s advertising system. If you are a Facebook user, you will notice that advertising that is (hopefully) relevant to your likes and interests displays in the right hand column of internal Facebook pages. Facebook’s algorithms also pick up on behaviors from user “fanning” and groups a user joins (I urge you to test how efficient this is by fanning a page that might not follow the logic of your other fannings and see if more ads similar to this idiosyncratic page start to appear).

Facebook’s advertising is like catnip for marketers. It allows marketers to reach a highly targeted demographic efficiently and cheaply. Facebook users are spending more time on the network than ever (5.75 hours per month) and they have passed the 500 million mark for active users. But what about all those people that are surfing other websites? This is where I think a big F8 announcement this year or the next comes in. I’ll explain:

1) Facebook recently changed their privacy policies to be more open. The changes make all that good info mentioned earlier easily shared without users knowing it’s being shared on the web.

2) Facebook then began exploring auto-login for users on Facebook Connect (their login service for external websites) for preferred sites. This means that websites that have Facebook Connect will auto-recognize users if they are logged into Facebook and visit the external website.

3) Facebook started playing with a “meebo“-styled bar that will follow users around their browsing experiences on the web. Meebo uses their bar for advertising and sharing purposes. It’s not a stretch to think Facebook will do the same and probably add the ability to use Facebook Chat as well.

4) Finally, the big announcement that is being held very close to the chest at Facebook – Open Graph. Speculation suggests that Open Graph will function as a system allowing web developers to build independent websites using Facebook’s API. This will allow the developed website to inherit Facebook community attributes on designated pages. Think of it this way – if Facebook Connect is dipping your toe in the FB API pool, Open Graph could be diving in head first. I believe this is what scares Google the most. Until now, they have been the online ad leader for independent websites. Open Graph could change that.

Where this all comes together for Facebook is in their strategy of attacking Adwords for publishers. Soon (and this is pure speculation) blog writers, news outlets and independent websites will be able to embed Facebook’s advertising system on their pages. Many publishers will switch to this new system because they will now get greater click-throughs on the ads because advertisements will reflect what is on the page AS WELL AS the visitor’s Facebook profile demographic info. This is very very good for Facebook and a nightmare for Google as 97% of Google’s revenue comes from advertising.

I can’t wait to see how this shakes out.