Facebook Inc. keeps finding new and potentially annoying places to sell advertisements in its digital hangouts. That's good news for the company's bottom line, but it also may signal weakness.

Along with Facebook's controversies of late have been a steady drip of disclosures about fresh spots for Facebook's paid commercial messages. The company recently started testing different types of ads in Marketplace, its Craigslist-like section for people to buy and sell merchandise, and in Facebook Stories, its Snapchat-like video diaries. One of its executives told Recode this week that the company was experimenting with video commercials that play automatically in its Messenger chat app. Any minute now, I expect WhatsApp will start carrying advertisements for the first time after its CEO quit over disagreements that included selling ads in the private chat app. 

The lesson of Facebook's six years as a public company is that it's incredibly adept at making money, largely by finding new places to stick ads and by tailoring them to the specific needs of hotels, e-commerce businesses or other companies trying to reach potential customers. It's only logical for Facebook to keep extending the reach of its ad placements into hangouts where people are spending more time — and right now those include Facebook-owned Instagram, its video diaries, Messenger and WhatsApp, while the main social network fades somewhat in popularity. Among U.S. teenagers, Instagram, YouTube and Snapchat are much more essential than Facebook. 

Children Are Our Future

Facebook used to be the dominant digital hangout for U.S. teens. Now, other digital hangouts have eclipsed the social network.

Source: Pew Research Center survey of Americans ages 13 to 17

Note: The survey was conducted in March and April.

Finding more spots in which to place ads is an effective strategy only because they get results. (Yes, that means you, guy who says he is immune to advertising.) But Facebook's recent mini flurry of new ad types, and occasional reports of ever-higher prices, feel like evidence that the company is running short of places to sell commercials on its main social network. It follows that Plan B is to find new places to put them.

The question is, why is Facebook running out of ad room? Is it because people are using Facebook less or differently, because there's so much demand from advertisers, or both? The answer is impossible to know for sure, but it’s important to Facebook's future. 

Facebook could be running out of room to sell ads because of continued deliberate choices to favor messages from friends, family and other people users know over those from paying customers. Facebook has been saying for a couple of years that it can no longer increase the ratio of ads to unpaid posts. Facebook also said changes the company has made in recent months to stress quality over quantity of time spent on Facebook might crimp the amount of time people spend there. (It's also possible this policy change masked an existing trend of people using Facebook less avidly.)

In any case, whether people are using Facebook less or the company is tilting the scales in favor of friends, the pool of available ad spots will grow more slowly. Or put a different way, demand from companies that want to buy Facebook ads is outstripping the potential ad slots. That pushes up prices. Some avid Facebook advertisers are complaining that social network ads are getting too expensive for them. 1

It's been true for some time that Facebook’s balance of ad price and volume is changing. The number of ads showing up on Facebook's digital hangouts increased 8 percent in the first quarter from a year earlier, while average prices for those ads rose 39 percent. It was the fourth consecutive quarter in which the prices of ads rose more quickly than the amount. Company executives have said that Facebook's revenue growth will continue to be dependent on its ability to extract higher prices for the ads it sells.

Price Sensitive

Increases in the number of ads on Facebook had been a big source of the company's revenue growth. Recently, ad prices have become a bigger factor.

Source: Facebook disclosures

There are risks, however, as Facebook's ad-selling machine increasingly creeps outside the walls of the company's original social network: Users might get annoyed at seeing ads in unfamiliar places. Ad prices still might continue to climb to the point where some companies can't afford them anymore. And ads in newer places such as Messenger, Marketplace and WhatsApp may not prove as effective for advertisers as conventional Facebook ads.

As noted above, Facebook is proficient at keeping its perpetual revenue motion machine going no matter what. That means Facebook needs to continue to prove that its ads are worth buying for the millions of businesses that want them. Otherwise the engine will stall. And that means there is business logic to Facebook capitalizing on the popularity of its other hangouts to ring up higher ad sales.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

  1. It's worth noting that advertisers perennially complain about high prices, including on Facebook. I also would like to pay less for the products and services that I buy.

To contact the author of this story:
Shira Ovide at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net


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