With Facebook dominating the digital advertising business, it’s next frontier is shaping up to be the market for television advertising.
It won’t last, but Facebook’s growth train keeps chugging along for now.
The company said Wednesday that its revenue rose 51 percent in the fourth quarter, and it turned 52 cents of every dollar into operating profit. That is a remarkable profit margin, and Facebook’s best ever.
It was also the fifth consecutive quarter of more than 50 percent revenue growth — a re-acceleration after the company’s growth rate had seemingly peaked in 2014. And the number of people who use Facebook or the Facebook Messenger app at least once a month continued to climb, up 17 percent to 1.86 billion — more than the combined populations of China and the U.S.
Facebook has already warned that its incredible revenue growth won’t continue after mid-2017 because it won’t be able to keep shoving more ads interspersed in the feed of Facebook posts. This increased “ad load” has been a significant source of Facebook’s recent growth in advertising sales, although it is unclear how much. Facebook also said its costs would rise this year because it is investing more in its business.
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Even if Facebook’s growth slows in coming months, Alphabet’s Google and Facebook keep extending their advantage over everyone else in the digital advertising industry. That gives both companies the lead time and resources to find their next acts, and they are already laying the groundwork.
Like Google, Facebook keeps finding new potential hot spots for revenue. For Facebook, those new targets are its Instagram app and video everywhere in Facebook’s world.
Mark Zuckerberg can’t stop talking about how Facebook is becoming more centered on video because it is following the lead of people who are taking and watching more video online. But the focus on video also has the advantage of opening his company to big piles of fresh ad dollars. With $27 billion in 2016 advertising, Facebook took roughly 5 percent of all global advertising spending. The TV industry is about 35 percent. That is a juicy target.
That means the next big technology prizefight isn’t Facebook versus Google versus Snapchat, but the digital world duking it out against television. All them have their eyes on the roughly $190 billion spent each year on TV commercials. If Facebook grabs just 3 percent of ad dollars spent on TV in the U.S., it would add more than $2 billion, or about 7 percent, to its annual revenue.
To make the TV money come to Facebook, the company is doing everything it can to become more like TV. (Google’s YouTube is doing the same.) The company has tried to get more people to shoot videos of themselves and post them live; it is making a big push for Snapchat-type video clips in its Instagram app; and it is tweaking its computer models to emphasize more TV-like longer videos that hook people.
Facebook reportedly is also working on making a video-streaming app, perhaps in part so people can watch new kinds of TV-like Facebook video on their actual television sets.
Facebook’s transformation into something more like TV won’t be simple. Its advertising turned out to be ideally suited to the past five years of internet use shifting from computers to smartphones. It’s not clear Facebook has a similar pole position for the shift in advertising from TV to digital video. Facebook has been reluctant, until recently, to interrupt videos with commercial messages as TV does, perhaps because people flee during those digital ad breaks.
Also, if Facebook starts to pay people and companies to make TV-like videos, it will break the company’s unfair yet perfect near-zero cost of programming. Right now video is popular on Facebook. A recent survey by RBC Capital found a majority of nearly 2,000 respondents said they watched video on Facebook at least once a week. But it’s possible people will grow sick of opening Facebook, Snapchat, Instagram and Twitter and being engulfed in video.
The TV players aren’t sitting still, either, and are trying to adapt to changes in viewer and advertiser behavior. They’re trying to become more like Facebook, before Facebook becomes like them.
In a few short years as a public company, Facebook scaled the mountain and joined the power ranks of advertising-sales giants. To keep growing, Facebook will have to scale that even steeper TV mountain next.