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Facebook Has Just Scratched the Surface in This Important Market

By John-Erik Koslosky - Feb 19, 2016 at 2:45PM

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Smaller businesses have been warming to Facebook's ad platform.


Facebook (META -0.76%) can now count some 2.5 million businesses as advertisers, the company says. It's a staggering number of advertisers for any single business to claim, even one that operates worldwide. But Facebook may have just scratched the surface.

Why? Because more than 50 million businesses use the platform to reach out and connect with customers by maintaining free pages on the Social Network, the company says. And Facebook is still in the very early stages of a push to convert more of those businesses to paying advertisers.

COO Sheryl Sandberg said growing the number of active advertisers is the company's No. 2 priority moving forward -- behind only "capitalizing on the shift to mobile."

It's doing that by following a playbook it intends to apply not only to Facebook, but also to other parts of the company's platform, like Instagram, Messenger, and WhatsApp. Here's how Sandberg spelled it out in reply to an analyst's question last month:

[W]e have a formula for how we build these businesses. First, you build a great consumer experience that helps people share in a new way that's really important. Then after that you can start to introduce organic ways that people can interact with businesses, so that in Facebook is pages, the businesses that people want to interact with [...] not necessarily ads, but organic interactions around not necessarily just your friends and families but more public figures and businesses. And then only once you have that ramped up to a good scale, can you really start dialing up advertising, having that feel good and be a good part of your experience with good content, because all those public figures and businesses are already participating in the platform at scale.

Businesses will be interested, and here's why
Facebook has at least four strategic advantages to winning a bigger share of the small and medium-sized business ad market moving forward:

  1. It has a massive reach, almost regardless of location. With more than 1 billion daily active users, Facebook can deliver potential customers to smaller businesses like no other ad provider can, with the notable exception of Alphabet.
  2. Most of those businesses are already familiar with the platform, and probably actively use it to court and maintain relations with customers.
  3. Facebook is developing next-generation advertising technology that aims to both improve targeting of the right customers and demonstrate effectiveness to the paying advertisers.
  4. As computer use continues to migrate toward mobile, perhaps no company has been better than Facebook both in getting us to use its apps -- some 20% of our time on mobile is spent in one of the company's apps -- and in monetizing its mobile users.

When taken in combination, those advantages put Facebook in a strong position to turn small businesses into advertisers and keep them on the platform.

Lots of room to run
The local advertising market is huge. It's been estimated at nearly $132 billion in 2016 by Borrell Associates. And roughly half of that remains in the hands of legacy media and other traditional advertising vehicles like billboard and mailers.

Although newspapers have been losing ad revenue consistently for nearly a decade now, in the United States the industry still holds onto more than $14 billion in advertising a year. Radio, meanwhile, maintains $11 billion in ad revenue annually. Combine that with ad money being spent on cable TV spots, direct mail campaigns, directories like phone books, and signs along the highways, and that's a lot of money that has yet to find its way to a digital platform like Facebook.

Facebook won't draw all those advertisers away from traditional outlets. But with $18 billion in 2015 revenue, the company would seem to have a long runway ahead in the local ad game.

Of course, it's no slam dunk
One of the biggest challenges will be convincing those businesses that spending money on Facebook advertising will offer a significant return on investment as compared to simply maintaining a free page, especially for those businesses that have been getting traction without paying for ads on the platform.

It will also have to pry many of those advertisers away from advertising vehicles like local newspapers and radio stations, cable TV, and direct mailers that they may have been using -- and using with success -- for a long time.

Even though businesses may recognize that consumers' habits are changing as technology advances, changing how they spend their money isn't an easy sell.

But as Facebook continues to develop and refine ad tech that allows for improved targeting and measurement, it should be able to scale that down to smaller businesses and win over paying advertisers who are now spending money with legacy media, billboards, and mailers.

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