Facebook investors shuddered on Wednesday at the sight of hurdles ahead for a social network that has been sprinting for years, sending its shares down 8 per cent in after-hours trading.
After beating expectations for 14 consecutive quarters, tripling profits in the last quarter and generating over 50 per cent more revenue year on year, Facebook warned that revenue growth could slow next year. It forecasts that in the middle of 2017, it will hit the limit it has set on the number of advertisements that can be shown in the main app’s news feed.
The limit is designed to ensure that users do not become overwhelmed by adverts. Norm Johnston, global chief strategy and digital officer at advertising agency Mindshare Worldwide, said Facebook’s monetisation had been “extraordinary” but the network might be right to put a limit on the number of ads. “At a certain [stage] there is an inflection point, where it does become too much. In a world of ad-blocking, you have to be careful,” he said.
However, while the limit will remove a key driver of growth — Facebook’s ability to put more and more ads in front of users.
“As we slow ad load growth, we’re going to have a slowing on revenue as well,” said David Wehner, Facebook’s chief financial officer. But he added that Facebook could make changes to reduce the impact on revenue.
With 1.8bn monthly active users, who on average spend 50 minutes a day on Facebook, Instagram and Facebook Messenger, the company has options:
Increase prices — Facebook ads are sold at auction, so with restricted inventory and high demand, prices could go up naturally. Facebook has 4m advertisers, but 60m businesses use Facebook pages for free. If even a small proportion of those could be persuaded to pay to promote their posts, prices would go up. Youssef Squali, an analyst at Cantor Fitzgerald, said Facebook’s primary task is to expand its advertiser base by making it even easier to create ads and to compare with other platforms how effective these are. Facebook was recently criticised for making an error in how it measures video advertising, so Mr Squali thinks it could do more to build confidence with advertisers.
The site could also change the balance of advertisers’ access to certain slots to further prioritise higher-paying marketers. Brian Wieser, an analyst at Pivotal Research, said this would not be difficult. “There are advertisers that are willing to pay more than they pay now and Facebook can prioritise selling more to those advertisers,” he said.
Selling new formats — Mark Zuckerberg, Facebook chief executive, spent much of Wednesday’s earnings call describing how Facebook was becoming a video company, and how it was designing a new camera-first experience (that sounds like Snapchat), as he extolled the virtues of Facebook Live, its live streaming service.
Debra Aho Williamson, an analyst at research firm eMarketer, said Facebook had done a “pretty good job” with video ads. But it had only begun to “scratch the surface” as it plans other spaces for video, such as a specific video hub which would be more suitable for so-called pre-roll or mid-roll ads that play before or during a video.
But Rich Greenfield, an analyst at BTIG who downgraded Facebook to neutral in July, said Facebook did not have a “clear answer” on how to generate revenue from long videos. “If you watch 15 minutes of a CNN video on an explosion, how do you monetise that 15 minutes of time spent in the news feed?”
Improving ads for some industries — Sheryl Sandberg, Facebook’s chief operating officer, said it had seen “strong growth” in ecommerce, consumer packaged goods, retail and entertainment media. But she admitted that it took a longer time to persuade industries such as travel and carmaking to advertise on the platform. She said the social network was working on ways to improve measurement for car dealers — while people are unlikely to buy a car on their mobile phone, they do start the process of researching. For the travel industry, Facebook is rolling out so-called ‘dynamic’ ads with ‘book now buttons’ and retargeting audiences which have searched for specific travel dates.
Increasing advertising spend outside North America — More users joined the network from Asia in the third quarter than in any other region, as people buy smartphones and connections improve. But the average revenue per user in the US and Canada is $15.08 in the quarter, compared with an average of $3.89 across the world. Facebook is expanding its advertising business outside the US, including creating specific ad products to run on slower internet connections and older phones in emerging markets.
But the overall digital advertising market remains small in developing countries. “Developed markets are where the advertising dollars are and developing markets are where the user growth is happening,” said Ms Williamson. “Ad spending is still very much in development so the pool of money for Facebook to go after is much smaller.”
Opening up other Facebook family such as Instagram, Facebook Messenger and WhatsApp to businesses — Mr Zuckerberg laid out his “three stages of growth” for each app on the earnings call.
Instagram is already in the third stage, with eMarketer estimating that it will bring in $1.9bn in revenue this year and $3.6bn in 2017. The photo-filled app has not yet reached its limit for number of ads in the feed, having only truly started monetisation last year.
Facebook Messenger is one step behind, experimenting with allowing businesses to contact consumers for free through one of 33,000 bots in the app, but will look to generate revenue from that soon.
WhatsApp is at the earliest stage, having not yet begun to work with businesses, but the SMS-replacement app is preparing to allow companies to message their customers.