During Facebook's (NASDAQ:FB) last couple of earnings calls, CFO Dave Wehner has mentioned that operating expenses at Facebook are expected to grow rapidly in 2016. So, when Facebook told reporters that it was shutting down FBX -- its desktop ad exchange -- and what remains of LiveRail -- a video ad platform -- it was a sign that the company is looking to prioritize its expenses and consolidate some overlapping operations.
Going forward, Facebook will focus on drawing more advertisers to Facebook Audience Network, its mobile ad network. One big difference between FBX and FAN is that advertisers buy ads directly from Facebook (or at least its API) with FAN, whereas FBX buyers buy from other ad platforms. Additionally, FAN is limited to mobile apps and websites, while FBX is directed at Facebook's desktop ad inventory.
What Facebook is saying goodbye to
FBX allowed websites to buy retargeting ads based on their browsing history on websites. If you visited a retailer's website and looked at a specific product, you might see an ad in Facebook's right-hand column featuring that same product.
This kind of retargeting boosted Facebook's ad effectiveness when it first rolled out. Some marketers saw a 50% decrease in cost per click and a 200% increase in return on investment. Twitter (NYSE:TWTR) is reporting similar results with its dynamic product ads, which use technology it acquired from TellApart last year to retarget ads across devices. Twitter said DPAs produce click-through rates twice as high as normal ads, and conversion rates on those clicks are double as well, producing four times the effectiveness.
But News Feed ads have quickly grown more popular and more profitable for Facebook. Facebook's average ad price continues to climb as more users spend more time on mobile, mainly because mobile doesn't include right-hand column ads. As such, a higher percentage of ads are News Feed ads, thus driving average ad prices higher.
Facebook is also axing its LiveRail video ad platform. LiveRail provided a set of tools to allow digital video providers like Hulu to sell video ads. As more digital video shifts to mobile, Facebook will help video platforms fill their ad inventory with Facebook Audience Network.
Focusing operating expenses on mobile
Last quarter, Facebook generated 82% of its revenue from mobile. Over 90% of its users access the social network through mobile, and more than half access it exclusively through mobile. Facebook Audience Network had already reached a $1 billion revenue run rate 18 months after launching.
The decision for Facebook to concentrate its ad business more on mobile probably wasn't difficult despite the fact that desktop advertising still carries higher average ad prices in general. So, shuttering FBX and LiveRail will clear room in the budget for Facebook to do just that.
CFO Dave Wehner guided for operating expenses to increase 30% to 40% in 2016 on a GAAP basis. The increased expenses will mostly revolve around Oculus and video. Last quarter, operating expenses increased slower than Wehner's full-year outlook, but he said the costs will ramp up over the remainder of the year. Facebook has been posting strong operating margins, but those could come down in 2016 as operating expenses pick up.
One way for Facebook to maintain its high level of profitability is for it to cut costs in areas like FBX and LiveRail. Twitter is taking a similar approach as well. It recently stopped supporting its buy button in order to focus on the aforementioned dynamic product ads. CEO Jack Dorsey let go of 300 employees in October to refocus the company and keep costs in check.
While Facebook's actions aren't nearly as drastic as Dorsey's, they indicate that Facebook is focused on profitability and efficiency, not just on growing its revenue or customer base at all costs. Its old desktop adtech isn't driving enough profitability compared to FAN to justify continued support.
Moving more investments to the rapidly growing Facebook Audience Network will help improve Facebook's overall profit margin profile in the long-term.