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Facebook Idea Proposal (FB)

Facebook Idea Proposal (FB)
 

Will Facebook be able to monetize Stories at the same level as news feed ads?

Report Available: October 18, 2018

 

Blueshift’s initial research found investor backlash to FB’s second-half revenue and margin guidance. Its disappointing forecast partly stems from its efforts to promote the Stories feature on the main FB platform, a concept that has been hugely popular on Instagram. The company hopes Stories are more engaging than the traditional user timeline, but there is concern about whether revenue will suffer as ad units shift from the highly profitable news feed to Stories. Other concerns include lagging user growth and the end of third-party access to FB data that had been used to improve ad targeting.

 

Observations

  1. FB spooked investors with its revenue and margin guidance when it reported Q2 earnings in July. Although Q2 revenues were up 42% year-over-year, the company said its revenue growth rate would drop by a high single-digit percentage in each quarter during the second half of the year and that operating margins would decline from 44% in Q2 to the mid-thirties over the next couple of years. The forecast sent shares plummeting almost 20%, which translated into the largest single day market-cap decline in U.S. corporate history. The nosedive came just as FB appeared to have weathered the storm from the Cambridge Analytica data privacy scandal and controversy around election-related “fake news.”
  2. FB executives cited three main issues for their surprising guidance: foreign currency exchange rates going from a tailwind to a modest headwind; the decision to promote experiences such as Stories, which aren’t monetized at the level of traditional news feed ads; and its efforts to make it easier for users to limit what they share, a response to data privacy concerns that potentially makes FB’s data less appealing to advertisers. The expected decline in operating margins stems from continued heavy investment in a variety of long-term initiatives. The company expects expenses to rise 50% to 60% this year and that total expense growth will exceed revenue growth in 2019.
  3. The Story feature has been a huge hit on Facebook’s rapidly growing Instagram app, which largely copied the concept from SNAP. Unlike the traditional linear news feed, Stories are short, user-generated photo and video collections that disappear after 24 hours. Facebook executives believe the Story format is more engaging for users, keeping them coming back to the platform more often and staying longer. Some investors are concerned, however, about taking eyeballs away from the platform’s massively profitable news feed ads. Story ads are easier for users to skip than those in the news feed, and such ads may be harder to create as well. FB COO Sheryl Sandberg told investors that the company doesn’t yet know whether Facebook Stories will monetize at the same level as news feed ads. On the plus side, there is a possibility that Story ads will be more appealing for brand-building efforts than the news feed, which is dominated by direct-response advertising.
  4. FB’s number of daily and monthly active users were both up 11% in Q2 compared to a year earlier, but that represented a slower growth rate than the 13% in Q1. In Europe, those user metrics both fell in Q2 compared to the prior quarter, largely a result of new privacy regulations in the European Union. In North America, the number of daily active users has shown little to no growth for the past six quarters.
  5. Advertisers and agencies have continued to express concern about FB’s plans for shutting off access to user data by third-party providers such as ACXM and EXPGY. The change could hurt the precision of FB targeting, especially for advertisers that do not have their own transactional data. FB has said it plans to wind down third-party data access by October, though some have speculated they might find a way to restore such access by shifting responsibility for data use to brands and third parties.
  6. Blueshift’s April 23 report found evidence that FB could be in for an extremely rocky Q2 as some advertisers and agencies said they paused their ad spending for the platform in the wake of the scandals swirling around the social media giant. One source whose agency represents top brand names said his clients cut FB spending by 30% to 50% for April and May because of concerns about consumer backlash. Three other sources reported putting some FB spending on hold in early Q2. One source noted a small decrease in user engagement since mid-March, and another said ad impression costs dipped in the early weeks of Q2, possibly a sign of less demand from advertisers. Sources in Blueshift’s July 17 report said FB appeared to have weathered the storm from its data privacy and fake news controversies, though the source who was most bearish in April confirmed that clients’ FB spending was down as much as 15% in the second quarter as big brands were the most likely to be skittish about a possible backlash.

 

How successful will FB be in shifting users to its Stories feature in the near term? How will such a shift affect ad revenue growth? Will FB be able to monetize Stories at similar levels to news feed ads? If so, how long will that take? Will the Stories format be more appealing to large brand advertisers? Are advertisers seeing any change in user engagement that suggests people are using the platform less? Are they seeing any pricing trends that hint at reduced demand for FB ads? How will they adapt to FB cutting off third-party access to user data? To answer these and other questions, Blueshift will gather data and issue a market research report from independent sources in the following areas: Advertisers, Ad agencies, and Industry specialists.

 

Companies: Facebook Inc. (FB), Acxiom Corp. (ACXM), Alphabet Inc. (GOOG/GOOGL), Experian Plc (EXPGY), Snap Inc. (SNAP)

 

Research Begins: October 1, 2018

 

Are you aware Intro-act, our corporate access solution, is part of the Blueshift Research ecosystem? To learn more, go to Intro-act.com or check out our video suite.