Facebook (NASDAQ: FB) has taken a long-term approach to its business ever since it was founded in 2004. The social network took a long time to build an audience before it started to monetize it. Now, even with around two billion active users across its suite of web properties (1.3 billion on Facebook, 500 million on WhatsApp, 200 million on Instagram), Facebook remains cautious moving forward with new monetization efforts.
In fact, Facebook seems to be leaving money on the table in the short-term. It's turning away willing advertisers and has yet to monetize very much outside of the main Facebook platform.
This is good news for users, as they avoid getting inundated with advertisements or products that aren't quite perfect. It's also a great strategy for Facebook, as pleasing its audience and increasing engagement is the biggest key to its long-term success. And even if it annoys some small-budget businesses, it will probably work out for them in the long run too.
Facebook won't let me advertise!
Facebook is increasing add prices to attract advertisers that produce quality, engaging content. In fact, Facebook's average ad price increased 123% last quarter as its product mix shifted toward more expensive newsfeed ads. Facebook plans to continue increasing average ad prices by rolling out video ads in the near future.
Facebook's minimum ad spend for video is $600,000. As Mark Zuckerberg noted on the company's second quarter earnings call, "the content has to be really good, and we think that that's going to be a real high quality experience." Many small businesses simply can't afford to produce a video ad that's up to Facebook's expectations at this point.
Additionally, Facebook is limiting its ad inventory, only placing video ads on the newsfeeds of users who have responded well to organic autoplay video posts. Limiting the rollout to a few select customers that will purchase large amounts makes it easy for Facebook to manage the early kinks. Moreover, it allows Facebook to learn what works with video ads and what doesn't. Once it lowers its minimum ad spend, it can pass that information on to small businesses.
Facebook is taking a similar approach with Instagram ads. Instagram ads remain limited to a select base of customers that produce high quality images that advertise their brands. Facebook is being extremely cautious with Instagram as the platform continues to grow, and now has over 200 million users.
It's 2006 all over again
Zuck likened Facebook's position with Messenger, WhatsApp, and Instagram to where the company was with facebook.com in 2006. They are currently platforms to communicate with friends, and businesses aren't really a part of it for the most part.
With regards to Messenger and WhatsApp, Zuckerberg mentioned that payments will be part of the platforms at some point in the future, but there's a lot of groundwork to be laid first. He wants to improve businesses' abilities to communicate with consumers via these platforms first, just as it did with Facebook Pages. We're talking years, not months or quarters.
Zuckerberg told analysts, "We could take the cheap and easy approach and just try to put ads in or do payments and make some money in the short term, but we're not going to do that." It would be foolish to do otherwise considering there are so many alternative messaging platforms. The user experience needs to remain excellent.
Delaying a payments platform could put Facebook at risk of missing the wave of early adopters and early majority. Forrester Research expects mobile payments to reach $90 billion by 2017, and there are a lot of big name competitors vying for their piece of the market in 2014. A head start could be huge for the competition, but if Facebook executes well, it will be able to leverage its built-in audiences.
Foolish investing requires long-term thinking. Leaving money on the table now for a bigger payoff in the future has been the key to Facebook's success thus far as it puts its user experience ahead of monetization every time. Increasing engagement improves the profit potential, and Facebook has already capitalized on a lot of that potential. From the sounds of it, it has well-laid plans to continue to do so.
Adam Levy owns shares of Apple. The Motley Fool recommends Apple and Facebook. The Motley Fool owns shares of Apple and Facebook. 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.