The rise of Facebook “The Advertising Company” has been impressive.
Only a couple of years ago, it was still “just a social networking company”, and it wasn’t until recently that Facebook officially became the second largest digital advertising company. Facebook now commands over 19% of online advertising revenue, driven by record numbers of users across its platforms, which represents 64% year-over-year growth.
But how did Facebook get to this point? What has it done to enable this type of opportunity and revenue growth?
All The Users
Ushering in the “Age of Social Media”, Facebook quickly became the most widely-adopted, and by extension, the default social site. Once it became the recognized source of all things social, it was a matter of momentum — if the company didn’t do anything to cause mass exodus, people would continue to join the service to be where their friends and family are. For many, Facebook is not only a platform —it is “the internet”. Facebook encompasses all online experiences. This is an incredibly privileged position to be in: not only the default online network, but the only online network and destination.
Facebook has realized that in order for the company to remain on top, it has to ensure that it controls any threats to its social dominance and share of attention. When Instagram became the platform of choice for photo posting and sharing, Facebook realized that Instagram had to become part of the Facebook network. Similarly, in the world of messaging Facebook realized that, especially in places outside of North America, WhatsApp had become the dominant messaging service, and so another acquisition was made. Facebook has even gone so far as to pre-empt the virtual reality market with its purchase of Oculus, a big bet on both the future of human-computer interaction and the place where people will devote their attention in the future. Facebook by many measures has been a smart acquirer. Even without successfully closing Snapchat, they are without any question the most dominant force in how people young and old share, discuss, message and spend time online.
All of these acquisitions have served to solidify Facebook’s position as the largest social network. Across photos, messages, virtual reality — in addition to the social graph of Facebook itself — Facebook is number one.
At the time of IPO Facebook was criticized for its business models. I remember sitting in a well known financial pundits office in New York hearing how he thought there was no room for Facebook to make more money, and how the IPO was a bum deal. I mentioned how much latent potential Facebook was sitting on and specifically how I thought the street was not recognizing Facebook's strong future. Nobody seemed to understand a) how its advertising model differed from the tried-and-true display advertising model, and b) how its revenue of $3.7 billion for 2011 was less than it should have been for a company of that size and ability. We’ve since seen that Facebook is fully capable of making money. Revenue for 2016 was $27 billion, enough to be comparable to Google as an advertising technology giant.
Facebook’s advertising push has been notable for its use of the native format — ads appearing alongside Newsfeed content. This is a huge vote of confidence for the format that has been slowly gaining traction as a legitimate replacement for display banner advertising. In comparison, Google started rolling out support for programmatic native ads in 2016, lagging somewhat behind Facebook in its adoption of the format. The integration of native with the Ad Exchange open programmatic offering is still only in beta, with the hope that it will be fully released soon.
Native has shown a great deal of promise for publishers, as the format promotes viewability and user interaction by blending in with the site on which the ad is displayed. One could argue that without the size of audience that Facebook commands, advertisers would not have been willing to rework ad creatives to fit the format at the scale they have. Facebook’s investment in advertising has been good for Brands who see unparalleled CTR, access huge audiences and benefit from incredible targeting capabilities. Investors and of course Facebook have also won huge. Whether users win is more a question for the ages but based on usage, most people, myself included, continue to feel that their loss of privacy and non PII based targeting is worth the cost of admission.
Google isn’t going anywhere, but what about Facebook? Is there a future for just a social media company? Isn’t Snapchat going to take the next generation of social media users and sidestep the Facebook behemoth altogether? The internet debate wages on, but it does feel like we are in an age where the very largest tech companies have increasingly large barriers to entry.
Lets re-evaluate what exactly Facebook brings to the social media table. Sure, younger generations have a lower Facebook adoption rate compared to their millennial cousins, but that does not mean that Facebook has been ousted from its place as the default social network. In fact, “it's weird if someone doesn't have Facebook since it's the easiest way to find someone… so most teens still do have an account regardless of how little they use it.” While Facebook may not be the most used, or most personal, platform any longer, it is still the standard for making social connections online. And that is immensely powerful.
Part of the reason that Facebook has grown in importance for marketers and advertisers is that it has the unique ability to drive huge amounts of legitimate traffic to advertisements on the site. Traffic is driven by many different platforms on the open web: search (Google, Bing), referrals (Reddit, news aggregators), and “content from around the web” networks (the Taboolas and Outbrains of the world).
“Around the web” networks have been dependable traffic sources, Taboola and Outbrain specifically are more expensive than their competitors but have good reputations for quality, while cheaper options have historically had issues with fraud. Fraudulent traffic doesn’t help anyone in the chain, and this is where Facebook shines as a high quality referrer with exemplary best practices. Because the ads shown in Facebook are done in-feed while the user is logged into Facebook, the vast majority of clicks coming from Facebook are likely from real people. To put the prevalence of bots on social networks into perspective, a recent study of Twitter showed that nearly 15% of Twitter accounts are not real people.
Many publishers rely on advertising for their businesses — they need to tell people about their product, get their products in front of likely customers, and generally drive engagement with their businesses. Facebook is able to target ads to its users based on very specific parameters, all using the information that each person has volunteered through their Facebook profiles and browsing habits. Facebook also has rather cleverly built a network of “Like” buttons all over the web, each one capable of cookie-ing visitors and matching those page views back to Facebook user profiles.
As previously mentioned, Instagram is quickly becoming the primary way by which younger people are interacting with their social groups. Luckily for Facebook, Instagram is a platform that it owns. Since Facebook has also offered its Messenger service as a standalone messaging app, in addition to the purchase of Whatsapp, Facebook has secured its place the go-to distributor of social posting and messaging products for some time to come.
The more distant future is still unknown, but Facebook thinks it has an idea of what that will look like. With their purchase of Oculus, Facebook has bet that the future will contain virtual reality. And if virtual reality is something that will be mainstream, that will be an important part of society, Facebook wants to own it.
Facebook has shown consistently that they are willing to bet on the future. They are willing to make huge purchases to ensure that they win those bets. Instagram: $1 billion. WhatsApp: $21.8 billion. Oculus: $2 billion.
Facebook’s bet is for the future of attention. When there are no more people to attract to the Facebook platform, the next avenue for growth is to increase their total time on Facebook-owned properties. When the time spent on the platform increases, whether that is through Facebook, Instagram, WhatsApp, or Oculus, the opportunities to monetize increase.
It’s the company’s willingness to invest in its future, and in technologies where it believes the future of attention to reside, that makes Facebook such a force in technology. If it was less willing to pursue the new picture-sharing app in Instagram, or the biggest messaging platform in WhatsApp, it could be argued that Facebook would be beginning its journey down the path to being an “also ran”. But it has concentrated on remaining at the top of the tech heap, both as a social destination and as an advertising technology company.
Facebook has secured its place as the default social network, and as long as it continues to command attention, invest in emerging technologies, and evolve with a rapidly changing landscape, its position and business model is safe.
The Open Web
The question of the open web is still unanswered.
Facebook is an entirely walled garden platform. After an unsuccessful attempt to manage an open web ad network with Liverail (mostly video) and Atlas (mostly display), Facebook has returned to doing what it does best: monetizing Facebook properties. Facebook is a shining example of doubling-down on core product. Branching into the open web was an experiment that was quickly killed in favour of investment in Facebook’s own properties — albeit for good reasons. I believe with Liverail in particular, the amount of arbitrage, fraud, and publisher development complexity came as wakeup call to Facebook trying to understand open web dynamics.
In contrast, Google is dominant on the open web, but the argument could be made that it is increasingly disinterested in investing in open web technologies. Advertising on Google’s walled garden properties provides roughly 70% of total revenue. These properties grew 20% year-over-year in 2016, while Google Network Members’ properties (the open web) only grew by 7%. If the trends point to higher growth and profitability being concentrated in Google’s properties, does that mean that the open web will be de-emphasized as a result? Does the investment in open web advertising justify its cost, and does it justify its cost compared to investment in Google’s primary income generators?
If the two giants of the advertising technology industry move toward only serving and investing in their own properties, who is left to serve the open web? Who is able to support and work with independent publishers? These indie publishers are working to produce great content while at the same time attempting to make it as a business, competing with limitless numbers of competitors across the internet.
There is a huge opportunity for those with experience and expertise to work on behalf of the publishers to ensure that content produced outside of the vast walled gardens of Google and Facebook remains a feasible business. Digital advertising is a constantly-evolving technology that requires investment and hard work. It requires dedicated effort to be profitable on the open web, and many publishers don’t have the ability or resources to keep evolving at the same rate.At Sortable, we’re working to serve publishers on the open web. We believe that the open web should both continue to exist, and should be invested in so that it can thrive for the foreseeable future. We’re working with our partners to make this a reality. Find out more about the future of publishing and monetization by chatting with us, we would love to hear from you.