Say what you will about Facebook's (NASDAQ:FB) privacy policies, the social media company has largely kept your data to itself. That's about to change. Sort of. Last week, Facebook introduced Topic Data, which allows advertisers to see what Facebook users are saying about certain topics. The data is anonymized, so no one's going to see that you, personally, love caramel macchiatos (macchiati?), except your friends.
Opening up the firehose of data can be extremely valuable for advertisers. Twitter (NYSE:TWTR) has made an entire business out of licensing its data to all sorts of businesses, not just advertisers. Whether Facebook will go full Twitter and license data to enterprises and other Internet companies remains to be seen. In the meantime, it provides an opportunity for Facebook to continue increasing its average ad prices.
Offered free of charge ... sort of
Facebook isn't charging any sort of premium for anyone to use Topic Data, which it's partnering with DataSift to provide. Twitter, comparatively, strikes individual deals with companies that want to license its firehose of data. Last year, Twitter generated $147 million in data licensing revenue -- more than 10% of revenue.
Instead of charging to license its data, Facebook plans to benefit from an increase in advertising activity. If a brand has more information about its audience, it'll be encouraged to run more ad campaigns, or target its ads more specifically. Both activities would increase Facebook's average ad price.
Improving ad prices is near the top of Facebook's priorities -- even if CEO Mark Zuckerberg talks about connecting the world, it's still a business with expectations from Wall Street. Ad inventory is declining due to changes Facebook made to its right-hand column ads as well as a shift from desktop to mobile. As a result, Facebook relied on increasing ad prices last year to offset declines in inventory.
And increase it did. In 2014, the average price per ad increased 173%. The trend accelerated in the second half of the year after the aforementioned changes to the desktop ads. As a result, Facebook has some tough comparables in 2015.
Providing more ways to target audiences through Topic Data, Facebook should be able to continue to raise its average ad prices as more advertisers bid on the same number of ads.
A future in data licensing?
Topic Data may be Facebook's first foray into opening up its firehose, but it could be the start of a lucrative business in licensing its data similar to Twitter. Facebook has nearly five times as many active users and stronger engagement, meaning its data are likely worth more than Twitter's based on sheer volume.
The value of a data licensing business is that it's a lot less seasonal than advertising. And once a partner starts licensing data, they come to rely more on that data. That makes it easy to increase pricing. In 2013, Twitter increased its data licensing fees 27% for existing customers. And despite the phenomenal growth in Twitter's ad revenue during 2014, the company actually grew its data licensing business faster in the second half of the year.
But Facebook has plenty of time to weigh its options. The company is poised to continue growing its ad business through 2015 with the help of its new Topic Data service as well as a push into video advertisements, which typically carry a higher price per ad than static advertisements. Overall, analysts expect the company to grow total revenue 37% for the year, but expect growth rates to remain above 30% for the foreseeable future.
Licensing its firehose of data is a nice option to fall back on if its plans to monetize its satellite properties don't work out as expected.
Adam Levy owns shares of Apple. The Motley Fool recommends Apple, Facebook, and Twitter. The Motley Fool owns shares of Apple, Facebook, and Twitter. 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.