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Facebook’s ad revenue tops $10.1B as ad prices soar to offset supply slowdown
What marketers need to know from Facebook's Q3 2017 earnings report.
Neither political controversies nor measurement mishaps nor its own execs’ warnings have slowed Facebook’s advertising machine.
Before Facebook was outed as a tool for Russian trolls to try to sway last year’s US presidential election, and before the company disclosed a series of measurement errors, its executives warned that Facebook’s advertising revenue growth would slow in the second half of 2017. But that has yet to (really) happen.
During the third quarter of 2017, Facebook’s advertising revenue increased by 49 percent year over year to $10.1 billion, while overall revenue topped $10.3 billion on 47 percent growth. The majority of that ad money — 88 percent, or $8.9 billion — came from mobile, where Facebook made 56 percent more money than it made a year ago. That’s not to say that Facebook’s desktop ad business is on a downturn. In Q3, desktop ad revenue rose by 12 percent to $1.2 billion.
To be clear, Facebook’s ad revenue growth has decelerated but only barely, having slowed from 59 percent year-over-year growth in Q3 2016 to 49 percent in Q3 2017. Perhaps the company’s execs were overly cautious when forewarning typically skittish investors about the impending slowdown. Or perhaps Facebook has been able to offset the factors that would have put the brakes on its business.
When Facebook CFO David Wehner first alerted investors about the deceleration in July 2016, he pointed the finger at Facebook’s ad load. In the past, Facebook’s ad revenue growth was spurred, in part, by an increase in the ratio of ads to organic posts in people’s news feeds. But Facebook was maxing out on that ratio. As a result, Facebook needed to find more people to serve ads, to find ways to serve more ads to people, to get brands to pay more for the ads it could serve, or some combination thereof. And it has.
Buoying Facebook’s business growth is its increasing audience size. In Q3 2017, the average number of people using Facebook each month swelled to 2.07 billion, and 66 percent of those people — or 1.37 billion — checked Facebook daily. The more new people Facebook can attract, the more it can spread out its overall ad load.
However, the 16 percent increase in the number of people using Facebook daily exceeded the 10 percent increase in the number of ad impressions that Facebook served in the quarter. That indicates that, as much as user growth may have eased Facebook’s ad load pressure, it has not been nearly enough to completely offset it.
At the same time Facebook expanded the pool of people it can show ads, it has also extended those ads into new places, like Instagram’s Stories feed, Messenger’s home screen, Group feeds, and even in the middle of videos. None of those placements existed in Q3 2016. However, it’s unclear how much of an impact they made in Q3 2017.
The number of people checking Instagram Stories daily has surpassed 300 million, said Facebook CEO Mark Zuckerberg on Thursday, but the company still does not break out Instagram’s ad revenue.
And while Facebook’s adoption of TV-like ad breaks in the middle of live and non-live videos has the potential to attract TV-like ad dollars, Wehner said the placement has played “a really small factor” in driving up the company’s ad prices. Not only have Facebook’s ad breaks not yet significantly boosted Facebook’s ad prices, they have actually undercut the number of ads that Facebook can serve. “There are less impressions when people are consuming video, so that also is a factor as more time is spent on video,” said Wehner.
More money per ad
With fewer ad spaces to sell, Facebook has become more dependent on increasing demand in order to increase revenue. “Compared to a year ago, price is [a] much more important driver of our ads revenue growth,” said Wehner on Thursday. And the average price of Facebook’s ads is on an upswing.
In Q3, Facebook’s average price per ad rose by 35 percent year over year, according to Wehner. That’s the most that Facebook’s ad pricing has increased in a quarter since Q3 2015. And considering that Facebook has never reported a quarterly decline in ad pricing, it means that Facebook’s ads are more expensive than they’ve ever been.
Instead of attributing the ad pricing increase to a higher share of typically pricey video ads being sold, Wehner ascribed it to improved ad targeting. He did not cite specific areas where Facebook has improved targeting, but consider that in Q3 alone Facebook rolled out ways for retail and restaurant advertisers to target people who visited their brick-and-mortar locations, opened up dynamic ad retargeting to realtors, added household-wide targeting and let brands limit their video ads to only be shown while someone is already watching a video.
Also helping to raise Facebook’s ad prices is the rising number of brands vying for its ad inventory. The social network now counts more than 6 million monthly active advertisers, Facebook COO Sheryl Sandberg said on Thursday’s earnings call. That means the company has added at least 1 million advertisers since April 2017, when it crossed the 5-million-advertiser milestone.