Stories got a lot of attention during Facebook's (NASDAQ:FB) first-quarter earnings call. The social network says it now has 500 million daily active users (DAUs) on Facebook Stories and WhatsApp Status to match the 500-million-user milestone it reported for Instagram Stories last quarter.
Importantly, Stories are driving strong revenue growth for the company, which reported better-than-expected top-line growth for the first quarter. That said, Stories ads are priced well below feed ads, which resulted in a 4% decline in average ad price for Facebook. Stories did help contribute to a 32% increase in total ad impressions, however, well above the 8% increase in daily active users on Facebook.
During the company's earnings call and an additional follow-up call, CFO Dave Wehner gave several insights into the progress of monetizing Stories, and it appears to be very early in the process still.
Driving demand for Stories ads
Management said there are now 3 million active advertisers on its Stories products. That's up from 2 million the company reported just three months ago.
Wehner said there was a combination of factors that led to that spike in demand. First, advertisers are naturally attracted to the platform, which has strong reach (over 1 billion daily users across the family of apps) and good ad pricing. That's an opportunity to generate better return on ad spend than feed ads or placements in competing digital advertising platforms.
Second, Facebook is taking matters into its own hands with automatic placement for advertisers. Marketers can select automatic placement in the Facebook ad manager, and the company will maximize their ad budgets and creatives for their objective. That's resulted in some marketers automatically placing ads in Stories.
But that rapid growth in demand hasn't translated into improved ad prices on Stories. That's because supply is growing just as quickly. Finding the ad saturation point on Stories will take a long time, as management has noted in the past that there may be room for higher ad loads compared to feeds due to the way Stories are consumed.
That said, management believes there's still a long way to go. "We've got a lot of supply opportunity," Wehner said on the first-quarter earnings call.
Even more room to grow on Facebook
Management may have reported a similar number of daily active users for Facebook Stories as Instagram Stories, but that doesn't mean the two products are on equal footing in terms of monetization. Facebook Stories notably lagged its Instagram and WhatsApp analogs for a long time, and CEO Mark Zuckerberg even admitted to some missteps with the product's early days late last year.
"Facebook is much earlier in terms of engagement and monetization," Wehner told analysts in the follow-up call. He continued:
While we do have DAU interacting with Stories, it's not the same engagement level that we see on Instagram. So, we're still seeing progress and growth there. But Facebook is much more feed-weighted.
As Facebook pushes more users on its flagship app to engage with Stories, it could reach engagement levels on par with Instagram. Meanwhile, WhatsApp Status is hardly monetized at all.
Some big challenges
Facebook certainly has a big opportunity to grow revenue from Stories, but it's not without significant challenges.
Its biggest hurdle is in developing more advertising products for small businesses. Currently, Stories ads get the best results for branded ad campaigns. Direct response marketers are better off spending more for feed ads since they're able to convert so much better.
"Ultimately, we believe we can increase demand for Stories as we attract more advertisers and bring more effective direct response units to Stories," Wehner said. "Over time that will play through to increased prices, but this is going to take years, not quarters."
The second challenge is that Facebook risks cannibalizing its feed ads business. Stories ads could dampen the growth in feed ad pricing, which is the only lever it has left to grow ad revenue from feeds. "There definitely has to be some cannibalization for people who are doing feed ads as they get Stories," COO Sheryl Sandberg said. "But we've seen that over time as we move people we're able to get increasing shares, hopefully, of their budget, but it's our job to earn that."
If Facebook can overcome these challenges, it has years of strong revenue growth ahead of it still.