Beyond plans to spend like crazy on everything from search to virtual reality, Facebook gave investors little to complain about in its fourth-quarter results reported Jan. 28. Ad revenues jumped a stunning 53%, and they would have been five points higher but for currency fluctuations. Mobile ads rose to 69% of those revenues, up from 53% a year ago, a sure sign of the company's progress in making advertising on phones and tablets compelling. Annual revenues blew past $10 billion for the first time.
But investors pay for future profits, so it's important to step back a bit and assess how well Facebook is positioned vs. an always-growing pack of rivals--Snapchat, Pinterest, Google and YouTube, Twitter, and yes, even Yahoo. In particular, it's not yet clear that Facebook has cracked the opportunity for brand advertising, the kind of image ads that dominate television, where most advertising dollars are still spent.
It seems like Facebook Chief Operating Officer Sheryl Sandberg has been talking about talking to brands for several years now, and she mentioned this once again on the earnings conference call. To her and the ad team's credit, Facebook has made some progress in getting some brand spending to move over to the social network--thanks both to Facebook's nearly unmatched TV-scale audience and a wealth of data that allows for more precise targeting and measurement of results. "The market increasingly understands that we have the biggest mobile platform--people-based marketing at scale," Sandberg said on the earnings call.
Still, brand advertising is clearly still a work in progress at Facebook (otherwise, Sandberg probably wouldn't need to talk it up so much). So what's the problem? One ad agency executive I talked to has an idea, and it involves not only advertising but the reality of Facebook's core service, its news feed.
The issue, says Craig Elimeliah, senior vice president and director of creative technology at RAPP, is that Facebook has saturated its most lucrative audience, the U.S. and to some extent Europe. There's the rest of the world, but CEO Mark Zuckerberg says the Internet.org effort to get them online is one of Facebook's 10-year projects, not three to five years.
To keep growing--not just audience but time spent on the site, which leads to revenues--Facebook must give people more reasons to use it than they have, Elimeliah says. While Facebook has frequently changed up the look and the algorithms of the news feed, we're still doing basically the same things on it that we have for years: watching a bunch of cat videos, fake news stories from the Onion, and photos from friends. Nothing wrong with all that, but it's pretty passive, especially for a social network in the hyperconnected age of Snapchat.
"They really haven't evolved the engagement on the platform much," says Elimeliah. "There's a lot of noise and clutter." He thinks the rise of Snapchat shows how young people want closer, more immediate interactions with friends, and advertising that works in that context. Indeed, Elimeliah says he's "blown away" by Snapchat Discover, its just-announced content and advertising service. The "low-friction" experience is already getting kudos from media types. "It blows Facebook out of the water from an engagement standpoint," he says, because it fits so well into the intimate and yes, ephemeral Snapchat service.
Now, on the face of it, Facebook doesn't seem to suffer as much as people may think from lack of engagement. Almost two-thirds of monthly users actually visit on a daily basis. But it's no secret that engagement among teens may be on the wane. According to iStrategyLabs, almost 3.3 million U.S. teens users between 13 and 17 have left Facebook since 2011. Clearly that hasn't hurt Facebook much so far, but it's a bit of a canary in the coal mine, indicating Facebook could be losing touch with the next generation.
The brand advertising issue may end up getting at least partly solved on its own. Facebook is making a big push into video ads, but it has been rolling them out slowly to avoid annoying Facebook users. The idea is that as those users start to post more of their own videos, instead of mostly photos, video ads will look more natural in the news feed. "We want the ads to blend into the consumer experience," Sandberg says. And video ads will be plenty appealing to brands, whose marketers and agencies already know how to create them, even if they have to take into account the smaller screens and shorter attention spans on mobile devices.
Still, Facebook needs to make sure it provides the right context for those ads--a place where ads not only seem natural but play in a context that isn't quite as noisy and distracting as the current news feed. Video ads also seem unlikely to be effective unless they are made to be consumed on the go and provide actionable information--so they can't be simply downsized TV spots. "I don't know if the Facebook platform can make that kind of change," Elimeliah says. Indeed, Pivotal Research analyst Brian Wieser wrote in a note to clients that Facebook may need a new venue for these ads: "While management did not convey that it believed it necessarily required premium content to capture more video ad spending, our guess is new initiatives (perhaps a video portal akin to YouTube or Vimeo) may eventually emerge to help monetize inventory beyond existing sales activities."
Of course, Facebook also has Messenger, Instagram and WhatsApp, each of which could provide different experiences for various kinds of brands and brand messages. There's also the Facebook Audience Network, which can run Facebook ads on many other mobile apps. If Facebook can offer advertisers a unified way to reach all those users and target them with the differentiated messages that will work for each of them, it might just get those brand dollars it has been craving for years.
