It’s taken Facebook (NASDAQ: FB) just on 10 years to become the ubiquitous online platform of our time. With its Facebook social networking site and its acquisitions, Instagram and WhatsApp, the company has successfully created effective ways for users to build communities, communicate and consume content. But of course, Facebook is also an advertising business, and it competes with other advertising businesses – the majority of which should be worried.
Let’s start with a comparison between where consumers spend their time and where advertising dollars flow. In the US, for example, it was the case that in 2015, 65 percent of ad dollars went to TV, radio and print. And yet Americans spent only about half their media-consumption time on these three platforms.
On the other hand, consumers spent 25 percent of their media-consumption time on their mobile devices. And yet only 12 percent of ad dollars was spent on this platform. There is a clear mismatch here. Advertisers have been slow to keep up with the evolving behaviours of consumers. Though they are catching up.
Within mobile also warrants examination. In the US, social media advertising revenues have been growing at rates north of 50 percent per annum. According to a US-based advertising consultant we spoke to recently, “Advertisers should be spending 80-90 percent of their mobile budget on social.” The reason? Dollars should follow eyeballs. And anyone with children aged between about 18-35 years old will know exactly where the eyeballs are today.
Facebook has become just about the most valuable tool an advertiser could ever hope for. Imagine a database of more than 1.9 billion monthly-active-users globally. And as each of these users interact with the platform – whether they are posting photos and videos, or texting their friends – Facebook’s algorithms are being continually updated. These algorithms can be used to provide advertisers with precision targeting down to groups of about 1,000 people. Advertisers can use this platform to determine who sees the ad, when they see it, and in what format they see it. And they can measure results every step of the way to better optimize for the next campaign.
Such precision targeting dramatically increases the value-proposition of Facebook as an advertising publisher. Compare this to, say, TV, or print, or radio where the same message is blasted out to whomever might be watching, reading or listening at the time – and with results that cannot be measured particularly well.
And for advertisers who may not want to advertise on Facebook or Instagram? It seems Facebook has them covered now too. You see, Facebook recently built out a network of third-party publishers, collectively called Facebook Audience Network, which allows advertisers to target consumers on third-party mobile apps and sites while still using Facebook’s targeting algorithms.
If you are a competitor to Facebook, life is certainly tough. And, of course, a hot new competitor to Facebook is currently the talk of the Street and planning its initial public offering (IPO): Snap. If you want to advertise to 12-24-year-olds today, Snapchat is a highly-effective property on which to do so. But is it a business worth buying? That’s up to you. Though we do make a couple of observations which are quite remarkable on their own: (i) In the most recent December quarter, Snap grew its revenues by 29 percent since the prior quarter. But Facebook did 26 percent growth over the same period – despite being more than 50 times larger. And (ii) Snap has not yet turned a profit. Over the last four quarters, Snap delivered an operating loss of nearly half a billion US dollars.
It’s hard to make money in advertising these days. It’s hard, that is, unless you are Facebook.
Montgomery owns shares in Facebook.
Andrew is responsible for managing the Montgomery Global Fund, ASX-listed Montgomery Global Equities Fund (ASX:MOGL) and global equity long/short strategy, Montaka Global Fund. Andrew oversees $500m in FUM.