Backlash Isn't a Problem For Facebook Inc's New Ad Policy

Earlier this month, Facebook (NASDAQ: FB  ) announced changes to its ad-targeting policies. Most notably, the social network is planning to utilize data collected from other websites and mobile apps through various measures. I prefer not to bore you with the details of exactly how it's collecting these data, and for those truly interested, you can find that anywhere on the web.

Instead, I'd like to focus on the disconnect between the constantly news-connected minority, and the vast majority of Facebook users. Based on my own scant research (asking people at the coffee shop), almost nobody knows about this policy change. For those entrenched in the media, however, there's a ton of controversy about it.

For most web users, they are blissfully unaware of how Facebook or Google (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) target their ads. And even if they don't "like" it, they're not going to stop using their services.

Tell me if you've heard this one before
Facebook has had its fair share of algorithm updates and ad policy changes. Many have been more publicly noteworthy than this most recent one. The biggest public outrages, however, have come from changes to Facebook's website design.

Yes, we're all very superficial. ("But first, let me take a selfie.")

But even when Facebook faces backlash from any number of changes, the public usually gets over it quickly. Regardless of how much noise is made on the Internet about what Facebook does, active users keep growing and the company keeps improving profits.

Profits are the bottom line (literally and figuratively)
For shareholders, the biggest concern ought to be Facebook's future earnings potential. It should be unequivocally clear that this policy change improves Facebook's potential for earnings per active user. The amount of users who stop using Facebook due to the policy change also plays a factor, but that's likely negligible.

The theory is simple. The change will allow users to see more relevant ads. More relevant ads get more clicks. More clicks means more conversions. Advertisers will pay more for more conversions. Thus, ad prices rise.

Advertising revenue accounted for over 90% of Facebook's total revenue in the first quarter.

Whereas in 2013, the company rolled out and improved its new ad formats, increasing ad prices seems to be Facebook's primary goal in 2014. Last quarter, Facebook increased its average ad price 118% year over year.

While ad price growth was relatively small in the first half of 2013, that number started climbing significantly in the latter half. In the third quarter ad prices increased 42% year over year, and they increased 92% in the fourth quarter.

In order to continue growing at such a robust rate, Facebook will need to implement ways to increase its value for advertisers. The latest policy change is just a small step toward that goal.

Google does it too
Google follows a similar policy to the one Facebook outlined in its press release. In fact, Google may be even more capable than Facebook at gathering data on its one billion-plus users.

Most websites use Google Analytics to learn more about their visitors behavior on the site. Google offers the service for free, just as Facebook offers things like "Log-in with Facebook" or the "Like" button for free. In exchange, both companies are able to collect data from the website. That includes, as Google notes, "the web address of the page you're visiting and your IP address."

In other words, you don't need to be logged into a Google service for it to track your web browsing. That doesn't stop hundreds of millions of web users from using Google service, though, and it won't stop them from using Facebook either.

This is just how the Internet works.

If you really don't like it, that's OK
If you really don't want Facebook using the data it collects on your from around the web and your mobile apps, it won't. You can opt out. That's not going to stop it from collecting those data, though.

The fact is, however, that Google and Facebook are collecting these data to improve your user experience in an effort to improve their profits. If it really caused them to lose a lot of users, it wouldn't be effective and these companies wouldn't do it. So far, the numbers show these policy changes work, and I'd expect this one to work just as well.

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Adam Levy

Adam has been writing for The Motley Fool since 2012 covering consumer goods and technology companies. He spends about as much time thinking about Facebook and Twitter's businesses as he does using their products. For some lighthearted stock commentary and occasional St. Louis Cardinal mania

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