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Facebook's Teen Problem Is Finally Showing Up

By Adam Levy – Aug 24, 2017 at 7:33AM

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But it already has a solution.

Shortly after Facebook's (META 2.24%) initial public offering (IPO), many investors started expressing concerns about the social network's cachet with teenagers. Former CFO David Ebersman added fuel to the fire in 2013 when he told analysts teens in the United States are spending less time on Facebook.

Those concerns lingered for a while before Facebook proved no one -- not even Snap's (SNAP 3.08%) Snapchat -- was really taking teens away in those years. But a more recent report from eMarketer says the number of American teens using Facebook fell 1.2% in 2016, and that rate will accelerate in 2017 to 3.4%.

The good news is teens are spending more time on Instagram, which Facebook bought in 2012. The bad news is they're also flocking to Snapchat. Should Facebook investors be concerned about its teen problem?

The "like" icon on the entrance sign to Facebook's headquarters campus in Menlo Park.

Image source: Facebook.

Instagram is Facebook's saving grace

Although Facebook's teen engagement is falling (not only in the U.S., but also in the U.K.), Instagram is still attracting more users. The photo-sharing app surpassed 700 million monthly active users in April and it has over 400 million daily active users. Its Snapchat Stories clone -- the cleverly named Instagram Stories -- has over 250 million daily users.

Instagram is still growing rapidly. Usage is accelerating following the release of Instagram Stories. There's even still room for growth among American teens, possibly the app's biggest demographic. eMarketer expects U.S. users between 12 and 17 years old to grow another 8.8% in 2017.

That said, Snapchat is growing even faster. Users between 18 and 24 are expected to grow another 19.2% this year. Snapchat's U.S. 12- to 24-year-old user base is expected to surpass both Facebook's and Instagram's in the U.S. this year, according to eMarketer.

But Instagram arguably has higher-quality engagement than Snapchat. Instagram recently announced its users under the age of 25 spend 32 minutes per day in the app. Those older than 25 spend 24 minutes per day on average. That's nearly as much time as Snapchat users spend in Snapchat.

What's more, where Snapchat is often used as a communication tool, most of the time spent on Instagram is used to consume content from others. That provides a lot more monetization opportunities for Instagram compared to Snapchat.

Facebook definitely isn't going anywhere

Despite a drop in teen engagement in the U.S. and U.K., Facebook isn't hurting for users. Last quarter it surpassed 2 billion, and it doesn't seem to be slowing down. While most of Facebook's growth is coming from emerging markets, which generate much lower ad revenue per user, there's still a ton of potential for Facebook to monetize them.

Young people might prefer Instagram and Snapchat, but older people (with more disposable income) spend tons of time on Facebook. Facebook says its average user spends over 50 minutes per day across Facebook, Instagram, and Messenger. That lends itself to Facebook's strength in targeted direct response advertisements.

Facebook is always looking for new ways to increase engagement. Earlier this month it started rolling out a new Watch tab for original shows in its app and on its website. The goal is to get more users watching video on the site in order to show more valuable video ads. It's not the most original idea, but neither was Instagram Stories, and that turned out to be a huge success for Facebook.

The Facebook app has its challenges, but it's done well to offset them with other initiatives. Likewise, the accelerating growth of Instagram should help offset a declining teen user base in some of its most valuable markets despite competition from Snapchat.

Adam Levy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.

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