How Facebook's Recent Algorithm Change Will Make the Company More Money

Facebook organic reach and engagement has plummeted for some big brands. Find out why Zuckerberg and company expected it and what it means for Facebook's future revenues.

Jun 20, 2014 at 8:20AM

A new study released by Simply Measured shows Facebook's (NASDAQ:FB) algorithm changes caused engagement to drop substantially for the majority of its most-followed brands. Only two of the top 10 most-followed brands (MTV and Harley-Davidson (NYSE:HOG)) saw engagement increases. The other eight saw engagement numbers drop as much as 95%. Even counting MTV and Harley-Davidson, the total engagement decline for all 10 brands combined came out to 40% when you compare total engagement in May 2013 to this May. 

  • Starbucks (NASDAQ: SBUX): -29%
  • Disney (NYSE: DIS): -21%
  • MTV: +56.3%
  • Mercedes Benz: -51.2%
  • Harley-Davidson: +17.7%
  • Intel (NASDAQ: INTC): -36.3%
  • BMW: -57.2%
  • Ferrari: -81.7%
  • Tiffany and Co. (NYSE: TIF): -44%
  • Audi USA: -94.8%

Image ID:47858211; Copyright: ivosar; published June 12, 2014

On the surface, this seems like bad news for Facebook, but it's not. In fact, odds are this plunge will only lead to more revenue for the social media platform, as some of the biggest brands increase their ad spending to offset unpaid engagement losses. 

Why this plunge will increase ad revenues for Facebook
Top brands used to get lots of free advertising on Facebook due to their organic reach. Organic reach is unpaid for exposure to others in the Facebook network. For example, if Starbucks posted to its timeline many of its "likers" would see the post. However in August of 2013, Facebook tweaked its algorithm and news feed to motivate businesses to raise the quality of their content – and to encourage them to spend more for paid ads.

At the end of 2013, Facebook made another algorithm change that decreased the average page reach for top brands by 44%, according to Simply Measured's study. The top brands responded to the lack of engagement by increasing the number of posts to Facebook. Total posts increased by over 20%. Facebook's news feed does not feed all posts to users' news feeds in real-time. It does so by relevancy, which is a combination of engagement in the past and other factors. However, the bottom line is If an advertiser makes more posts they are likely to reach more users organically.

It takes more than more posts 
However, even with this extra effort from the top brands engagement still fell by over 40%, according to the Simply Measured year-over-year comparisons. Together, these brands reach 358 million of Facebook's over 1 billion users. However, their posting strategies have not generated the results they've grown accustomed to. With both organic reach and engagement losing ground, it's likely most will have to increase their paid advertising efforts to engage the same percentage of Facebookers. 

According to estimates from Business Insider, these advertisers spend the most on Facebook.

  • Samsung: $100 million
  • P&G: $60 million
  • Microsoft: $35 million
  • Amazon: $30 million
  • Verizon: $30 million
  • Nestle: $30 million
  • Unilever: $30 million

None of the 10 brands studied made the list. So look for ad revenues to grow as these and other brands try and overcome declining engagement by spending more on Facebook ads. 

Why big brands will pay up
According to eMarketer, global mobile ad spending reached $17.96 billion in 2013, a 105% increase from 2012. Spending is projected to climb another 75.1% to $31.45 billion this year. The two big players, Google (NASDAQ:GOOG) (49.3%) and Facebook (17.5%), owned nearly 67% of the market in 2013. However, Google's share dropped from 52.6% in 2012, while Facebook's jumped from 5.4%.

The "Big Two" grabbed 75.2% ($6.92 billion) of the additional $9.2 billion that advertisers spent on mobile ads in 2013. Facebook is also likely to cut into Google's share even more this year. eMarketer forecasts Facebook's share will grow to 21.7%, as Google's share falls to 46.8%. By comparison, Twitter (NYSE:TWTR), the third leading generator of mobile Internet ad revenue, will only have 2.6% of the market.

Foolish takeaway
If major brands want to make a splash or keep their message in front of over a billion Facebook users, they'll have to conform to Facebook 's new way of doing business. This means paying for reach and engagement and that will lead to higher ad revenues for Facebook.

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Chris Brantley has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google (C shares), Intel, Starbucks, Twitter, and Walt Disney. The Motley Fool owns shares of Facebook, Google (C shares), Intel, Starbucks, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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