relentless growth no longer a given on its main platform, the social-media titan now faces a question that was previously an afterthought: How to squeeze more money from its other apps and services?
Some of those products, including photocentric Instagram and messaging-service WhatsApp, are hugely popular with users but Facebook hasn’t always moved with urgency to get maximum profits out of them.
The pressure is on now as the company faces a paradigm shift after its shares dropped almost 19% on Thursday following a warning that its growth will slow through the end of the year.
The biggest-ever slide in Facebook shares, which followed its quarterly earnings report late Wednesday, shaved almost $16 billion from the holdings of Chief Executive Officer
The 14-year-old company has typically taken a slow-and-steady approach to generating income from its various services. Instead, Mr. Zuckerberg has been more eager to gather an audience first—and then sell advertising to those users at some point later.
But Facebook’s main app, internally called “Big Blue,” is starting to show signs of age. Facebook’s user base in the U.S. and Canada is stagnating, while in Europe it fell slightly in the second quarter, partly due to stricter privacy laws enacted in May.
Facebook has been under scrutiny in recent months after it disclosed that political analytics firm Cambridge Analytica improperly accessed information about as many as 87 million Facebook users. The company recently tweaked some of its products to allow users to opt out of certain types of targeted advertising after the resulting furor.
Some external data released earlier already showed that Facebook users were spending less time on the platform, and Facebook warned as early as late 2016 that its advertising growth rate would eventually slow.
But the magnitude of the decline took Wall Street by surprise, and some analysts hypothesized that Facebook was being intentionally conservative to avoid further regulatory scrutiny.
Executives on Madison Avenue were less surprised, given how the broader digital advertising market is maturing globally.
Digital-ad spending will account for 43.5% of the $628.6 billion spent on ads in 2018, up 17.7% from last year, according to estimates from research firm eMarketer. The growth in digital-ad spending between 2021 and 2022 is predicted to slow to 8.6%.
Facebook is estimated to control an 18% share of the global digital ad market this year, behind Google, which will take a 31% share, according to eMarketer. The issue for Facebook is that its fastest-growing category of ads isn’t as profitable as its old standbys.
Chief Financial Officer
said on Facebook’s earnings call that while users were flocking to consume content across its Stories format—photo and video montages that disappear after 24 hours—that kind of experience isn’t currently generating as much revenue as ads in Facebook’s and Instagram’s feeds.
Wells Fargo analysts estimate that ads in Stories generate about $1 per daily user compared with $9 from those shown in users’ Instagram feeds and $27 for ads in the Facebook feed.
Ad-industry executives said it would take time for marketers to gain comfort with the Stories format and see evidence that advertising on the platform is effective. Facebook plans to test ads within WhatsApp Status, a similar feature.
“The results so far are initially quite promising, but what we have to look at more is trends over time,” said
chairwoman of digital agency 360i, which works with clients including Hudson’s Bay Co., the National Geographic Channel and Kate Spade.
Instagram Stories, considered a Snapchat clone, launched in 2016 and has 400 million daily active users. Facebook Stories followed in 2017 and hit 150 million daily active users in May. Meanwhile, almost 1.5 billion people use Facebook and its news feed every day; that audience is relatively unmatched for advertisers looking to reach large audiences online.
From a user perspective, Stories can require a new behavior of swiping up to engage with an ad, rather than clicking on a web link, and many marketers are still experimenting with getting the creative format right.
“Some of the campaigns we run [on Stories] perform quite well from a branding perspective: good results, some uplift,” said
head of paid social for Europe, the Middle East and Africa at digital agency Essence, whose client roster includes Google and NBCUniversal. “The next question we are looking at is: Is that because it was on Stories, or the creative?”
WhatsApp, too, could be a source of advertising growth. The co-founders of WhatsApp, which Facebook acquired for $22 billion, in 2014 were notoriously against targeted advertising. But they left the company earlier this year and Facebook executives have signaled they would be open to introducing advertising to the messaging app.
With more than 1.5 billion monthly users, WhatsApp has the kind of scale advertisers desire, but user expectations of privacy on the app, which offers end-to-end encryption, will mean Facebook will need to tread carefully when rolling out ad products.
“It’s kind of the other shoe that’s been waiting to drop for a long time,” said Noah Mallin, head of experience, content and partnerships at Wavemaker North America, a media agency.