Will Facebook Start Taking TV Ad Dollars Too?

Will Facebook Start Taking TV Ad Dollars Too?

In this article from The Week, its economics and business correspondent Jeff Spross, argues Zuckerberg’s Curse (AKA Facebook) is fast moving its business to video and that could mean bad news for TV networks’ ad coffers…

(Please note this article is written from the perspective of the US market)

It should have been a great moment of triumph for Facebook. Instead, the social network’s stock took a precipitous nosedive.

Facebook released its third-quarter results on Wednesday, showing spectacular year-on-year revenue growth of 56 percent, arriving at $7 billion. Facebook’s third-quarter profits, meanwhile, grew almost 300 percent, to hit $2.3 billion.

Overall, the company has been on a tear. Revenue grew 59 percent in the second quarter, and has been pretty amazing all year. Not surprisingly, Facebook’s stock price has been on a tear too, rising 30 percent in the last year, and 230 percent since May 2012.

And yet, shortly after those third-quarter results came out, Facebook’s stock tanked by 7 percent. By Thursday, it had settled at a loss of around 5.5 percent.

What gives?

It boils down to the distinction between making money on volume and making it on price. In 2016, 57 percent of Facebook’s revenue growth came from new users or from established users spending more time on the platform — more eyeballs looking at ads for longer. Another 32 percent of that growth came from Facebook showing each of its users more ads.

Meanwhile, growth in the price advertisers have to pay Facebook to feature each ad accounted for a measly 11 percent of the increase in revenue this year. In other words, 2016’s gangbusters revenue increase has largely been about jacking up the volume of ads, not the price advertisers are willing to pay for them.

There’s an obvious natural limit to this dynamic. Facebook can only cram so many ads into your Newsfeed before you get mad. And when it released its third-quarter results, Facebook admitted this can’t continue: “Ad load will play a less significant factor driving revenue growth after mid-2017,” David Wehner, the company’s CFO, told analysts on a conference call. As a result, advertising growth will “come down meaningfully.” Hence the investor whiplash.

To keep Wall Street happy, Facebook needs to transition its strategy from volume to price. The social network must start making more money by charging advertisers more to feature ads on the platform. By 2018, growth in the price Facebook charges per ad is projected to account for 40 percent of revenue growth, while growth in ads per user will fall to just 8 percent.

Going forward, instead of worrying about scaring off users with too many ads, Facebook has to worry about scaring off advertisers by charging too much. But the company has a plan: video.

TV stations have traditionally been able to charge a premium for advertisements because of the value brands place on getting themselves in front of TV viewers across the nation. Particularly for appointment viewing that people must watch live (you’ve gotta love sports!), advertisers are downright eager to pony up for the chance to get a vanishingly rare shot at viewers’ undivided attention. A Bloomberg Intelligence analysis found that reaching 1,000 people on prime time television cost advertisers $50 in 2015, while accomplishing the same thing on Facebook cost just $5. Of the $500 billion spent on all forms of advertising in America each year, $200 billion still goes to TV.

Read the full article here.

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