Kunal Gupta, CEO of digital advertising firm Polar, comments on Facebook's Q4 2019 earnings call.
Author: Kunal Gupta, CEO, Polar
Facebook released their Q4 earnings last night and there were several clues as to where their business is headed. I have long said that Facebook is the biggest threat to any digital media business, more so than Google. The number of businesses, advertisers, campaigns and creatives that start and end in Facebook services and never see the web is unreal.
1. Facebook’s growth = advertising market recession
Full year revenue for 2019 was $71 billion with an impressive 27% growth rate. eMarketer reports that the global digital advertising market is growing only 15%. This means that if your business is not called Facebook, you are now in a declining market. I predict Facebook will cross $87 billion in 2020 and $104 billion in 2021.
2. Consumers are spending more time, not less, with Facebook
Facebook reported a 35% increase in ad impressions with only an 8% increase in user growth. They are already at max ad density (every 4 posts), which means only one thing: people are spending more time in feeds. Despite anecdotal comments of “I don’t use Facebook anymore”, competition from apps like TikTok and Snapchat and any user concerns over privacy, mental health and lost productivity, consumers are spending more time, not less, with Facebook’s services.
3. A perfect storm will impact ad targeting effectiveness
There are three privacy trends that are creating a perfect storm that will surely reduce the ad targeting signals available on Facebook in Q1. The first is regulatory with GDPR, CCPA and more. The second are the changes that mobile browsers have announced (e.g. cookies). And third, which I believe to be the most important, is OFA (Off-Facebook-Activity). This was conveniently rolled out in January (after Q4 and the holiday season) and enables over 2 billion Facebook users to see what Facebook knows about their activity on the web. It's scary. Even I was surprised to see how much of my browsing history Facebook had. With one click, I removed it all and turned off OFA to prevent Facebook from collecting any of my web data in the future (you will want to do the same, especially for your kids).
4. Facebook’s growth will come from small businesses
There are 140 million businesses that use Facebook’s free tools and they reported that 8 million of them are advertising now. Mark shared “a big focus for us is making sure that individuals in small businesses have access to the same kind of tools that historically only larger companies have had access to.” There was even a hint of empathy from Mark when asked about the coming changes in ad targeting signals, “a lot of the concerns that we have with some of the potential changes to the ecosystem we think will disproportionately hurt small businesses’ ability to compete with larger companies.”
5. Big brands slowing spend on Facebook
There was not much love for big advertisers by Mark or Sheryl. When asked about big vs small advertisers, Facebook’s CFO shared “we've seen our business diversify more, so we've seen our the largest advertisers grow more slowly than the next tiers”. Mark also appeared uninterested in solving problems for big brands, “Bigger companies are going to find ways to sell their things and measure the effectiveness of their ads and all that.”
6. Are ads really getting cheaper on Facebook?
Facebook reported a 5% decrease in ad prices, however this was driven by growth in their Asia Pacific business. 42% of Facebook’s users are now Asia Pacific while the region represents only 24% of their revenue. The ARPU in Asia Pacific is 12x lower than in the US & Canada. Anecdotal evidence tells me that ad prices continue to increase in the US, Canada & Europe.
7. Stories adoption by advertisers doubles in one year
There are now 4 million advertisers who use Stories, 100% growth from one year ago. Stories ads are cheaper (likely because viewability is terrible, have you ever watched an entire Stories ad? Likely not because they are skippable). CFO Dave Wehner commented, “CPMs are still at a significant discount to Newsfeed.” Advertisers are flocking here because they are cheap.
8. What’s the future of video on Facebook?
There was little mention of video. There was more excitement from Sheryl to talk about Instagram Explore than Facebook Watch. Mark commented “what we also found was that just straight consuming a lot of video on News Feed was displacing some of the social interactions and connecting with people.”. Brands know that the viewability of their videos in News Feed is quite poor and I suspect Facebook is now becoming aware of that feedback.
9. Facebook goes full funnel, eventually
There was a lot of excitement and focus on commerce, shopping and payments. Why? It’s not because Facebook plans to take a cut of the transactions. I think it’s because it enables them to become a full-funnel solution for businesses, especially small ones. What better way to prove advertising ROI than being able to directly link advertising to sales by facilitating the transaction? As we enter a new privacy-focused decade, Facebook wants to manage the end-to-end customer discovery and purchase journey for businesses within their platform and not rely on web attribution.
10. Messaging ads are the lower-funnel sibling to Stories
First, there was News Feed which drove the first wave of Facebook’s advertising growth. Now we are clearly in the Stories era which will drive the next wave of their growth. Messaging ads are the third wave and become the next Stories-like growth engine. Specifically click-to-messaging ads that encourage consumers to start a conversation with a business. Sheryl shared anecdotes of how these newer ad formats are driving qualified leads for small businesses. Where Stories are upper and mid funnel ad experiences, messaging ads are clearly their lower funnel sibling.
If you found these insights valuable, read our 60-page presentation, Inside Zuck’s Brain: Decoding Facebook.