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As Video Takes Off, Facebook Looks to the Next Step in Advertising

By Adam Levy - Sep 15, 2015 at 8:45AM

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Facebook starts testing its expansive (and potentially expensive) new ad units.

Facebook's new ad units look a lot like Instant Articles. Source: Facebook.

Last year, Facebook ( FB -1.14% ) made a big push into video. The number of video views on the platform has since ballooned to 4 billion views per day, and more and more businesses are starting to use video to advertise their products.

Many analysts expect an increase in video ads will ultimately lead to higher average ad prices for Facebook, because video is often more engaging and can provide significantly more information compared with photos and text. But Facebook's newest ad format looks to raise the bar even higher, combining video, photos, and text into one expansive unit. The social network is currently testing the new ads with a small group of advertisers.

Instant Advertorials
These new ads look like Facebook posts, but when clicked on they open a full-screen advertisement that functions similarly to Instant Articles. The ad loads within a second, and it's full of big images that users can rotate with a swipe, videos that take up the entire screen, photo carousels, and some ad copy.

The biggest advantage of these ads is that advertisers can essentially load a mini-website instantly. That was Facebook's big selling point for Instant Articles -- which have seemingly disappeared from the website. But instant load times are even more important for advertisers, considering the possibility of an abandoned click, which charges the advertiser but produces zero results.

There are several factors that may be holding back publishers from adopting Instant Articles. Most noteworthy is that they must cede control of their content to Facebook and thus become even more reliant on Facebook for traffic and ad revenue. A change of terms could become extremely detrimental to their businesses.

Advertisers, on the other hand, only care if an ad produces better results than the next best thing. If this new ad format can convert more viewers into buyers, advertisers will be willing to spend more on these ads. They'll almost certainly convert better than standard linked ads, directing Facebook users to an outside website. It's unclear, however, if they'll perform better than video ads, which benefit from Facebook's autoplay feature catching the eye of users browsing their News Feeds.

Cost per engagement should be high
If a user does decide to click on one of these ads, the cost per engagement ought to be significantly higher than any other ad format on Facebook. Because of the huge amount of content advertisers can pack into one of these ads, they have plenty of ways to convince users to buy whatever it is they're selling.

What's more, advertisers are able to insert multiple calls-to-action, which can whisk users away to an order page or a page with more information (like where the nearest store is, so you don't have to wait for shipping). In the future, Facebook may allow advertisers to include a buy button, which would allow users to learn about a product and purchase it, all without leaving Facebook.

Facebook has been growing its cost per engagement at an inflated pace for the past four quarters because of changes to its right-hand column ads on desktop. It reduced the number of ads in the column and made the images bigger. Additionally, a shift to mobile has helped increase its average ad price, as News Feed ads command higher pricing. When Facebook reports its third-quarter earnings, we'll get a more realistic look at how its ad prices have performed over the past year and the impact of video ads.

With 1.5 billion monthly active users, growth is slowing, particularly in its most valuable markets -- the U.S. and Canada. Continually increasing ad prices through better tech and innovations is essential for Facebook to continue growing at the pace analysts expect of it while it ramps up monetization of its secondary properties.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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