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Think Facebook Inc Has Too Many Ads? You're Wrong

By Jamal Carnette, CFA - Oct 22, 2015 at 8:31AM

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According to marketing company Socialbakers, very little of Facebook's News Feed is ads. For investors, this is a great report.

Source: Facebook.

The core business model for Facebook (META -0.76%) and Twitter (TWTR 2.25%) is pretty simple: Grow time spent on the site through a combination of users and browser share per user, and then monetize that traffic by delivering advertisements.

To evaluate companies, there are a few high-level data points investors should be familiar with. When it comes to users, most are familiar with the oft-referenced monthly active-user, or MAU, figure. Last quarter Facebook reported nearly 1.5 billion monthly active users, up 13% on a year-on-year basis. For a comparison, smaller microblogging site Twitter reported an MAU growth figure of only 12% to 304 million non-SMS MAUs.

This number is important, because the more users a social-media site has, the more easily it can monetize its advertisements without degrading the user experience with excessive ads (see: MySpace). A new report from Socialbakers, by way of Business Insider, shows how Facebook's immense scale is a tremendous competitive advantage.

Facebook is [almost] ad free
According to a study based on 900 users and analyzing more than 23,000 Facebook sessions, the marketing management company found that only 3% of Facebook's News Feed is actual advertisements. As I've outlined in a prior story, Facebook has found really creative ways to bring value to advertisers with its Carousel multi-product ad format, without increasing the actual ad load for users.

While not a perfect comparison, a "% ad load" -- a term denoting the percentage of experience filled by ads -- is very small, especially when contrasted with traditional TV, where nearly a quarter of viewing time is advertisements. If broadcasters followed Facebook to a 3% ad load, 15 minutes of commercials would be trimmed to under two minutes per television hour.

In terms of user experience, Socialbaker's data is good, but it's not even the best news about the platforms ad-feed management.

Facebook's ad load is going down
As I alluded to earlier, ad load is sort of a double-edged sword for social-media companies and, by extension, its investors. On one hand, increasing the ad load increases revenue in the short term, a positive for investors, but must be monitored so as to not turn off users, a long-term negative.

Other lower-risk ways to increase ad-based revenue include growing total users and increasing session length per user, which result in more ads viewed without an increase in ad load -- or charging more on a per-ad basis, which increases monetization, even holding all other factors constant.

Has Facebook succeeded on any of these metrics? According to its second-quarter financial report, italicized for emphasis: "During the second quarter and the first six months of 2015, as compared to the same periods in 2014, the average price per ad increased by 220% and 251%, respectively, and the number of ads delivered decreased by 55% and 59%, respectively."

On the back of a significant increase in per-ad fees and a growing number of users, the company has been able to cut ads and to still enrich investors.

Even if user growth and its enviable per-ad price increases slow, Facebook should be able to increase its ad delivery somewhat, considering it significantly cut it on a year-on-year basis.

Long story short, Facebook ad-based revenue growth is not close to slowing.


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