Facebook ad revenue shoots up 53%, sending shares climbing
This was one of the headlines as facebook announced its Q4 results from 2016. According to Facebook’s fourth-quarter results, advertising revenue was up a whopping 53% to US$8.63 billion. Not sure if any other firms has seen such an astronomical growth at this stage of its life. These numbers are even more monumental within the context of larger narrative of media companies - struggling to generate meaningful value - case in point Twitter. Perhaps it's unfair to compare social media platforms with facebook, for facebook is no more just a social media platform. It has scaled to mimic "TV" in a way that distribution is controlled by one single global entity, and that it leverages the global connection much better than any traditional media form has ever had.
ADVERTISING AND TV
Over the years, TV advertising has been dominated heavily by the biggies of commoditised services and products - the consumer products companies (P&G, Johnson & Johnson), alcoholic beverage firms (ABInBev) and credit card companies (American Express) for example. TV has provided a perfect platform to these firms to reach as many customers as possible at scale, at a time of the day when the cognitive load on the viewer is as minimum as possible. The products offered by these scale companies appeal to large section of the audience, and for that matter these firms are less interested in the "sophisticated" targeted advertising - a unique selling proposition of the Internet advertising.
Consumer mostly know enough about the product, the category advertised, so the large chunk of TV advertisements deal with the persuasive form of advertising. The one that lures consumers to buy product "By the Brand" - brainwashing customers to an extent when the brand becomes the product and the product becomes the brand (e.g. VISA, Kellogg). This mass-reaching, easy-going, highly persuasive form of advertising has been the backbone of TV.
GOOGLE(YOUTUBE), NETFLIX and FACEBOOK
There is a common understanding that despite all the hype around the digital advertising since the advent of Internet, it hasn't much affected TV's share of advertising. In the US TV's share of advertising has remained pretty much at little over 40% for the last two decades. In reality it has been the newspaper and magazines who have taken the hit, but TV's stronghold has remained strong as ever. On the other hand people are increasingly spending more hours per day on the Internet.
Estimated Global Time Spent (WSJ)
Facebook, Youtube and Netflix are the three strong standalone Internet medium commanding the lion share of entertainment hours spent on Internet. It is important to compare the entertainment-hours rather than include each and every online activity. Youtube recently crossed 1 billion-hours of video-watching in a day, whereas the estimated equivalent numbers for facebook and Netflix are 100 million and 116 million. Building on its massive video watching population, it recently announced launching a $35/month TV subscription service that will rival US cable networks. It would be easy to see Youtube as the most formidable challenge to TV or perceive Netflix as the next TV killer, albeit its low relative size. Despite these strong conjectures, facebook could become the next "TV" - with approximately average daily 1 hour spent on facebook ,over a 2 billion monthly active user base, facebook is generating 2 billion Internet hours per day. Though this number includes all-fb-activities, what's more interesting here is the type of user and consumption pattern.
fb - 25% growth in ARPU, Q4'15 to Q4'16
Facebook numbers are a clear reflection of how consistently it has pulled more and more advertising dollar from the other mediums, namely TV. Though the underlying driver of revenue growth can be attributed to growth in DAUs/MAUs, advertisement-load per user and the price of an ad, it can be argued that facebook's user growth will come to standstill sooner or later and that it cannot just keep increasing the ad-load without disrupting the user experience. For facebook, the price it puts on each impression will become the critical growth factor going further.
Growth in ad price can be attributed two unrelated demand supply effects. First, the shift in time spent on mobile versus desktop is one of the driver for average ad price increases. Facebook doesn't show the lower-value right-hand column ads on mobile devices, so the average ad shown on a mobile device is naturally higher cost than the average ad on desktop. The fact that 84% of facebook revenue comes from mobile is testimony to this effect. Second, there has been a gradual evolution of the mix of advertisers on facebook - from Internet/Technology/niche companies to the TV advertising giants - car makers, telecom companies, Consumer Product organisations.
fb's top advertisers in 2011 vs 2015
It seems that finally big buck TV advertisers have started taking facebook. In 2013-14 top adwords spenders on Google were Amazon, Priceline, Expedia and AT&T - more and less Internet/Communication companies. Facebook has become the go-to place for TV advertisers, facebook has done something remarkable here, something that Google couldn't do in years. Few things have worked exceedingly well in fb's favour:
Laid-back media consumption - opening the fb app has become a habit that require no trigger, but the "boredom" trigger. Much like how people switch on the TV when there is nothing to do, people refresh their fb feed. This is the state of mind that is most susceptible to persuasive advertising - the type usually rejoiced by typical TV advertisers.
Facebook isn't anymore the friend-space, but it has morphed into an all encompassing digital representation of our real lives. There are moms, dads, grandmoms on facebook - the overlap between TV population and facebook user base is quickly getting larger and larger. Advertisers like that a lot, for they can now push their mass products at scale online, something that Google couldn't do this well. Then there is the element of trust based advertising on facebook- users see advertisements based on common social connection. An add on google is just a link, with no intuition of where that link may take the user, but a facebook ad impression is verified through the trust. It is not difficult to see that underlying layer underneath brand loyalty is a the assurance of trust, and facebook allows advertisers to leverage it.
facebook is a metaphorical TV already, the gap is in taking that notion to reality by focussing on the next driver of growth and revenue- videos. It recently hired ex-MTV executive to develop original content. This is just a stopgap though, the real deal will be the VR. Sooner or later VR content will move from games to storytelling, and that would be the moment when facebook will push original VR content - series, plays and movies. Your TV will eventually become the headset, and perhaps the Oculus.