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.
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.