For the past six months or so, Facebook has been warning investors that it will max out the number of ads it can stuff into people’s news feeds sometime around the middle of 2017. The company has made this warning because its ad revenue growth will likely slow as a result. Facebook has options to alleviate the ad load pressure, like pushing more ads on Messenger, Audience Network and Instagram, the latter seeming best-positioned to shoulder the load. But not yet.
Despite Instagram’s success in growing its advertiser base to more than 500,000 brands and rolling out more ad formats, like ads within Stories, Instagram’s ad business may be growing at a more rapid clip than Facebook’s, “but it’s much smaller,” said Facebook CFO David Wehner, during the company’s earnings call on Wednesday.
“The ad load opportunities are higher on Instagram because Instagram is at a lower ad load than Facebook. So there is an opportunity for us to continue to grow ad load on Instagram probably beyond, you know, in a longer time frame than on Facebook because of that disparity in where they are today. But given the scale of Facebook and the importance of driving overall revenue, that’s why I’ve continued to express what our expectations are for advertising growth in 2017 and the reduction in the growth rate that we expect given the potential to grow ad load on Facebook that we expect to come down in 2017,” said Wehner.
That’s not that surprising. Facebook is a giant, and Instagram is a baby giant. And even if Instagram can’t yet offset Facebook’s ad load, Facebook still expects its advertising revenue to grow after its ad load maxes out, just maybe not at the 53 percent year-over-year clip the company has averaged over the past eight quarters.
Facebook isn’t wholly reliant on increasing its ad load to increase ad revenue. It’s important, but it’s one of three factors driving Facebook’s ad revenue growth. So long as it can get more people to use Facebook and the people who already use Facebook to use it more often — the two other main drivers of its ad revenue growth — its ad revenue should increase, not to mention if Facebook can make its ads more attractive to its users and, as a result, to its advertisers who would likely be willing to pay more per ad for better results.
But there is the possibility that Facebook’s ad load could actually increase, despite three straight quarterly earnings calls warning that it will soon hit a ceiling.
While Facebook may not be able to stuff any more ads between organic posts in people’s feeds, it has started stuffing ads within those organic posts: the mid-roll ads it has begun inserting in live and non-live videos.
Facebook CEO Mark Zuckerberg kicked off Wednesday’s call by calling video “a mega-trend on the same order of mobile.” And everyone knows how Facebook has capitalized on the mobile trend.
Facebook is looking to spur people to watch videos on Facebook in the same way it got them to use Facebook on their phones. In addition to putting autoplay videos and live broadcasts in people’s feeds, Facebook has also inserted a video-only feed in its app, added options to stream videos from Facebook to a TV through Apple TV or Google’s Chromecast and is reportedly planning to roll out its own TV apps. And it’s stocking up on more of the types of videos that people will want to watch on TV, like episodic shows.
All of Facebook’s video efforts serve to make Facebook not only an app people open to see what their friends are up to, but where people turn when they want to watch a video, in the same way that they turn to Google’s YouTube, Netflix, Hulu or traditional TV. “That’s a pretty different intent than how people come to Facebook today,” said Zuckerberg.
To become more of a video destination, Facebook needs more of the videos that people will seek out when they want to watch something. And that’s why Facebook has been talking with professional video creators about licensing their shows, like Netflix and Hulu do, and getting them to post more videos to Facebook in exchange for a cut of the ad revenue, like YouTube does.
“I do think [the behavior of people visiting Facebook to watch videos] is going to get a lot stronger once the business model really starts to click here. Because a lot of the best episodic content is professionally created, and those folks need to make a good amount of money in order to support their business model,” said Zuckerberg.
If Facebook is able to turn on the revenue spigot for video creators, it can flood people with more videos they want to watch — and fill their feeds with more ads.
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