Facebook's Ad Shifts Power Its Earnings -- WSJ
July 27 2017 - 3:02AM
Dow Jones News
In posting 71% rise in net, social-media giant looks beyond the
news feed
By Deepa Seetharaman
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (July 27, 2017).
Facebook Inc.'s news feed is running out of room for
advertisements, but the social media giant is making up for it with
higher prices and new slots for ads in videos and its messaging
apps.
The company on Wednesday said profit spiked 71% in the second
quarter. While growth is still rapid, Facebook warned that the
number of ads in the news feed -- its primary source of revenue --
is hitting a ceiling.
Facebook and Google revamped advertising by making digital the
dominant platform over the past decade. Google, part of Alphabet
Inc., and Facebook together accounted for 99% of the online ad
industry's growth last year, according to Pivotal Research. But now
both tech giants are trying to figure out the next generation of
online advertising.
Google said earlier this week that it is serving up more ads on
smartphones and on YouTube, its video platform. While the newer ad
formats drove a 52% surge in the number of clicks, they are less
lucrative than search ads, Google's legacy business.
Facebook, meanwhile, is looking beyond the highly profitable
news feed to the rising consumption of video and its two chat apps,
Messenger and WhatsApp, for growth.
Chief Executive Mark Zuckerberg predicted video would become the
largest driver of Facebook's business over the next two to three
years, while messaging could yield dividends within five years. He
added that artificial intelligence could help advertisers figure
out which audiences to target on Facebook.
That shift isn't without risk to Facebook. These emerging ad
formats don't earn Facebook as much money as ones shown in its news
feed, executives said. They also need to build new types of ads
that can work outside the standard stream of posts that make up
Facebook's news feed and its photo-sharing app Instagram, which
together drive nearly all of the company's revenue.
"There are real questions there that we need to manage well,"
Mr. Zuckerberg said, of the company's embrace of video as a future
source of ad revenue. Facebook recently started testing mid-roll
ads, which appear at some point during a video on the social
network.
Mr. Zuckerberg also showed newfound urgency to cash in on
messaging. WhatsApp, he said, is now used by 1 billion people a
day. This month, Facebook introduced ads on Messenger, a rollout
that will inform how Facebook monetizes WhatsApp, executives
said.
"I want to see us move a little faster here, but I'm confident
that we're going to get this right over the long term," he said
during a conference call with analysts.
Facebook's stock was 3.7% higher in after-hours trading,
building on a 44% increase since the beginning of the year.
In the second quarter, net income totaled $3.9 billion,
surpassing its larger rival Alphabet, whose bottom line was hit by
a fine from European regulators. Revenue jumped 45% to $9.3
billion, boosted by a 24% increase in Facebook's average ad price,
executives said during the call.
Showing too many ads could turn off the more than two billion
people who check Facebook at least once a month. Today, one of
every seven to 10 posts is an ad in Facebook's news feed, said Jan
Dawson, senior analyst with Jackdaw Research.
The company is buying original video programming -- some shows
as long as 30 minutes an episode -- that could in turn offer
opportunities for advertising as part of Mr. Zuckerberg's broader
desire to transform Facebook into a "video-first" company. "Video
is part of what's going to expand the inventory of ads on
Facebook," Mr. Dawson said. "A half an hour of video is potential
for more ads."
The mid-roll video ads Facebook has been testing have lower
margins than news feed ads, executives said on the call. Facebook
shares a portion of the ad revenue with the creator in this
model.
The success of ad breaks "will depend both on the ad breaks and
on the content," Chief Operating Officer Sheryl Sandberg said in an
interview. Many advertisers are still repurposing television ads to
use on Facebook.
The television ads "do not work as well as ads that are natively
mobile, " Ms. Sandberg told analysts Wednesday. Ads that are
developed for mobile, Facebook's primary format, are shorter and
the brand is mentioned faster than in TV spots, she said. She
compared the strategy to the early days of TV ads when people read
ads in front of a microphone on screen.
Write to Deepa Seetharaman at Deepa.Seetharaman@wsj.com
(END) Dow Jones Newswires
July 27, 2017 02:47 ET (06:47 GMT)
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