Facebook's Q3 2016 earnings report, released last week, was yet another impressive showing of continued growth (in both user base size and ad revenue) for the company. The highlights:
- Revenues for the company were up by 56% compared to the same quarter last year;
- Facebook has reached more than 1BN DAU on mobile, with total DAU climbing to 1.18BN and total MAU climbing to 1.79BN;
- Mobile ad revenue amounted to $5.7BN in the quarter, at 84% of total ad revenues.
Unlike in previous quarters, however, during its Q3 earnings call, Facebook issued a word of caution: ad load in the newsfeed is reaching a point of saturation, and ad revenue growth will likely slow in the future. As a result of this circumspection, the company's stock price dropped by 8% in after-hours trading following the call.
While Facebook has been loath to explicitly acknowledge the impact on ad revenue growth that ad load saturation presents to the company, it has been preparing for that reality for some time with a broad change in content strategy over the past year. Rather than be a place in which content is discovered -- where users share content that links to external destinations -- Facebook is becoming a content destination in and of itself.
Facebook's original mobile ad model was an outgrowth of its use case: Facebook users shared content (UGC, or user-generated content) such as updates and photos / videos in the app, and Facebook native ads were fit into the newsfeed to seamlessly accommodate that. Native ads were made available for promoting Facebook-hosted content (such as posts, events, etc.) and, more lucratively, external content -- namely, apps.
Facebook doesn't break its mobile advertising revenue out by ad type, but mobile app install ads likely represent at least a majority of total ad revenue for the company: mobile app install ads have been the driving force behind Facebook's revenue growth over the past two years. Breaking down the various things that exist in the Facebook newsfeed (and Instagram feed) by either content or ad, the first two phases of Facebook's mobile strategy look something like this:
But while Facebook has integrated mobile app install ad units into one other property -- Instagram -- its other major mobile properties (Messenger and WhatsApp) have not been used to push those ad placements. Meanwhile, with video becoming more and more dominant as both a content and advertising format on mobile, the opportunity for mobile publishers to seize brand advertising dollars is ever more feasible. This tectonic shift has caused Facebook to change its content strategy in order to seize upon changes in the mobile advertising marketplace: shift consumption into Facebook's apps, boost impressions with native video (rather than with additional ads in the newsfeed), and bring native content to its other properties.
The two big initiatives that Facebook has pursued in this trajectory are Instant Articles, which became available for all third-party publishers in April 2016, and Facebook Live.
Instant Articles allow for third-party publishers to have their content cached and loaded natively in the Facebook app. This is a win-win-win scenario for users, publishers, and Facebook: users get near-instant access to content without having to awkwardly navigate through different apps, publishers get their content distributed to readers with less friction (and are able to integrate ads into that content to monetize it), and Facebook keeps users in its app while they consume external content.
Facebook Live, meanwhile, is Facebook's publishing product which allows users -- but especially celebrities and influencers, which the company is paying to use the service -- to broadcast live video. Facebook Live is of massive strategic importance for Facebook: it allows the company to bring video content into the newsfeed to offset ad load, it increases the non-newsfeed content surface area it can monetize (it is experimenting with mid-roll ads for Facebook Live feeds; these placements exist separately from the newsfeed and are far more appropriate for brand campaigns than the newsfeed), and it allows the company to satiate users' (and especially millennials') desire for video content without losing their attention to competitors like YouTube and Snapchat. Last week, Bill Maher hosted an election-focused stand-up special on Facebook Live that saw 100k concurrent viewers.
But the feature that will perhaps serve as the linchpin in this strategy was only recently revealed to be in beta testing: instant games that will be accessible from within Facebook Messenger. Like instant articles, instant games are lightweight, almost instantly loaded content that keep users within Facebook's sphere of influence (in this case, its Messenger app) and increase the company's content surface area without adding additional ads into its existing ad channels.
The possibilities for monetizing instant games are manifold. If, like instant articles, developers use ads to monetize these games, Facebook might at some point take a cut of that revenue. Likewise, it could also allow developers to buy app install ads for these games in the Messenger app, or maybe in the Facebook Newsfeed, which wouldn't decrease or offset ad load there but would serve to keep users within the Facebook app ecosystem (ads for apps inside Messenger versus ads for non-Facebook apps).
In moving into the third phase of its mobile content strategy, Facebook is repositioning the different content types that can exist within its ecosystem of apps to look like this:
That is: all content on Facebook is native content, and all native content can support ad monetization. But one major category is missing in the above: retail. If a platform for digital content discovery can evolve to serve digital content consumption, then the same should be true for physical goods. And as it happens, Facebook is currently experimenting with a model on Instagram that might facilitate that: it is allowing for physical products to be identified in Instagram posts so that users can purchase them from mobile retailers. Of course, the next logical step for this feature is to accommodate the purchase itself. Facebook hired ex-PayPal executive David Marcus in 2014 and has implemented payments in Messenger, recently allowing chat bots to receive payments, so the infrastructure for an e-commerce initiative is already in place.
Facebook faces challenges in expanding its advertising scope beyond what the existing product comfortably allows. But if some of its recent product decisions are any indication, the company is happy to make fundamental product design and functionality decisions that support increased ad penetration. Unlike Twitter, which seems to be stuck in a recalcitrant product stasis that won't allow for it to embrace the opportunities emerging in mobile advertising, Facebook is acutely willing to do so.