Facebook’s Q4 ad revenue swells despite decreases in time spent and North American daily audience

The cracks are starting to show in Facebook’s business, but the company appears to be trying to fill them before they grow wider and significantly impact the bottom line. The company’s fourth-quarter earnings report released on Wednesday mostly followed an upward trajectory — total revenue, ad revenue, mobile’s share of ad revenue, monthly audience and daily audience all rising — which made two declines even more glaring. First, people are spending less time on Facebook each day. The amount of time people spent on Facebook in Q4 shrank “by roughly 50 million hours every day,” Facebook CEO Mark Zuckerberg said in the company’s earnings report. But that wasn’t the only shrinkage that Facebook experienced. For the first time, Facebook’s daily audience in North America — its most valuable region in terms of ad revenue and revenue per user — dropped by 700,000 people from the previous quarter to 184 million. According to Facebook executives, both declines were by design. In Q4, Facebook began to show fewer viral videos in people’s feeds, among other changes, as part of its recent push away from passive content in favor of content that leads people to interact with their friends and family members, said Facebook CEO Mark Zuckerberg during the company’s earnings call. Coinciding with that push, Facebook’s daily usage among people in the US and Canada declined because they were no longer seeing as much of the content that had become their reason to check Facebook so regularly. And yet, while fewer people in the US and Canada used Facebook daily and those that did use Facebook spent less time doing so, Facebook was able to make more money from those people. For this audience segment, Facebook’s average ad revenue per user (ARPU) increased by 36 percent year over year to $26.26. More to the point, that ad ARPU increase for the US and Canada outpaced the company’s global ad ARPU increase.

Business is still booming

So how is Facebook able to make more money despite having potentially fewer opportunities to show people ads? Because Facebook has apparently been able to convince advertisers to pay more for the ads it can show, likely thanks to its continued emphasis on measuring its ads’ ability to return actual business results, such as product sales, to advertisers. “A year ago we saw mobile conversions — actions taken on a mobile website after viewing an ad on Facebook — surpass desktop conversions for the first time. In 2017, mobile conversions continued to accelerate,” Facebook COO Sheryl Sandberg said during the company’s earnings call. In Q4, the average amount of money that brands paid Facebook per ad increased by 43 percent year over year, continuing an annual pricing increase that has been going on since at least Q1 2015, when Facebook’s average price per ad swelled by 285 percent year over year. By contrast, the number of ads that Facebook served in the quarter inched up by 4 percent year over year, the lowest mark since Q3 2015, when the figure had declined by 10 percent. This ad-pricing growth appears to have countered Facebook’s ad load issue that would cause the company’s advertising revenue growth to decelerate as it maxed out the number of ads it could squeeze into people’s feeds. For more than a year, Facebook issued these warnings, and for more than a year, Facebook has been able to delay any significant deceleration. In the fourth quarter of 2017, Facebook’s advertising revenue increased by 48 percent year over year to $12.8 billion. And the company’s total revenue similarly swelled, by 47 percent year over year to $13.0 billion. Mobile increased its majority share of Facebook’s ad revenue. The company raked in $11.4 billion from mobile ads, up 53 percent year over year to account for 89 percent of Facebook’s overall ad revenue. However, while its desktop advertising business contributes a smaller and smaller share of its revenue, it continues to grow. In Q4, Facebook’s desktop advertising revenue rose by 17 percent year over year to $1.4 billion.

What to ‘watch’ for

However, Facebook’s future revenue growth could be hampered if its audience and usage continue to decline. But Facebook appears to be trying to preempt that possibility. In deemphasizing viral videos, Facebook will show people fewer of the videos that they’re likely to stop watching when a mid-roll ad interrupts their viewing experience. Instead, Facebook will try to steer people to its video hub, Watch. Because people would go to Watch with the specific intention to watch videos, they are more likely to be willing to sit through an ad break. And since Facebook is adding features to get people to interact with others watching a show — such as listing what someone’s friends watch and encouraging group viewing — Facebook’s recent algorithm change to encourage “meaningful social interactions” could further fuel this type of viewership.  All these efforts, and as a result of Watch videos’ longer lengths, are aimed at increasing the amount of time people spend on Facebook, as well as Facebook’s ad revenue. On the other hand, Facebook’s business could be hurt in other ways. After North America, Facebook’s second-largest region in terms of revenue is Europe. But that revenue may take a hit later this year, when the General Data Protection Regulation (GDPR) takes effect in May. At that point, people in the European Union will be confronted with the information Facebook collects about them and must decide whether they are OK with the company doing so. During Facebook’s earnings call, Sandberg acknowledged that “some users might opt out of our ads targeting tools” and that those users may use Facebook less often as a result of being made more aware of Facebook’s data practices. “We’re not forecasting a big impact here,” she said. “There’s some risk, and we’re watching closely.”