In 2017 Facebook generated roughly $40 billion in advertising revenue (49% yoy growth) from ~1.4 billion daily active users (14% yoy growth).
For today’s post I couldn’t *not* write about the Facebook dramas that are unfolding. I’m not going to focus on Cambridge Analytica, but rather how the whole saga could impact its cash-cow, advertising. More specifically, what may happen to the business unit that’s responsible for 97% of Facebook’s revenue.
What’s the problem?
Facebook’s existence is based upon its users, and their data. Increasingly we’re seeing them be poor custodians of that data. As a result, they’re having to navigate an unprecedented backlash.
Last week saw $50 billion wiped off the valuation of the company, with it now hovering around $496 billion.
The backlash is the culmination of drama, after drama, after drama. Consumers have had enough. They’re worried about their data, as well as Facebook’s darker side of influencing psychology, swaying votes, and quite a few other things.
Why is consumer behaviour changing?
The issue of digital privacy is troubling a growing number of consumers. A recent survey showed that 84% of respondents were concerned about the security of their personally identifiable information. Younger consumers, aged 18-35, demonstrated a higher concern than their 36-50 year-old counterparts. Growing sensitivity toward data exposure appear to have consumers on the verge of making serious changes in their behaviour. Keep this in mind when you think that about the fact that…
Facebook holds at least 100+ data points on you.
For the past decade the advertising world has been in an arms race. An arms race to develop tools to hoover up as much data about people as possible.
Social networks provided the golden ticket.
Users willingly gave demographic data, photos, geographic data, and much much more. This in turn enabled the platforms to sell hyper-targeted ads to advertisers.
One of Facebook’s most popular tools is its custom audiences. Thousands of companies rely on it for decreasing their cost of acquisition, finding relevant users at the right time.
Basically you can upload a database of email addresses, and Facebook will match those to other people who have similar characteristics on Facebook. It’s commonly used by political campaigns, which have large swaths of data from campaign volunteers, to target potential voters. But it’s also used by regular marketers like gaming apps and online shopping companies.
Want to target parents in their mid-50s who live in a certain city and have kids in a certain age bracket? No problem. The more targeted the ads, the more you’ll have to pay to reach those specific users. But anything is really possible.
Facebook have built an impressive ads platform, making it super easy to design, target and launch an advertising campaign all within a matter of minutes.
How does that impact Facebook?
From Facebook’s 2016 Annual Report:
We generate substantially all of our revenue from advertising. The loss of marketers, or reduction in spending by marketers, could seriously harm our business. Substantially all of our revenue is currently generated from third parties advertising on Facebook and Instagram. For 2016, 2015, and 2014, advertising accounted for 97%, 95% and 92%, respectively, of our revenue. As is common in the industry, our marketers do not have long-term advertising commitments with us.
This hashtag has been trending for the past few days, and it’s hardly surprising. As mentioned at the beginning of the post, these scandals, data breeches and overall public perception are having a real meaningful impact on Facebook’s bottom line, an 8% drop in share price isn’t to be ignored.
As of yet we haven’t had any dialogue from Zuckerberg or Sandberg. Only Boz giving a little bit of colour through Twitter.
Advertising after Facebook?
I’ve written in the past about what I think is in store for the future of digital advertising, but looking more closely the scenario whereby Facebook’s footprint is greatly reduced…
It’s a tough one. Mostly because of Facebook’s diversification – WhatsApp and Instagram being the two acquisitions that are bringing them in the most DAUs. They’re also sitting on $41 billion of cash that they could use to continue their strategy of ‘buying relevancy’.
I do think Facebook’s footprint will be greatly reduced through political oversight. The oversight giving more power to consumers over their data, making it easier to opt out of hyper-targeted ads. All of this means Facebook will earn less due to the decreased relevancy of the ads. I also think they’ll have to implement a lot more moderation and vetting around political ad campaigns.
We are seeing the historical duopoly being challenged
For the past several years, the dominant narrative in the adtech world has been the increasing concentration of power among the giants (Google and Facebook), and the increasing difficulty for startups attempting to crack the space. Data from eMarketer suggests that this duopoly may be eroding for the first time. Google & Facebook’s combined share of the US digital advertising business will drop this year from 58.5% to 56.8%.