The strategist's view: Facebook’s 24 month outlook
June 12, 2014
With the stormy IPO fading into history, ad-revenues exploding, and saturation-level use in developed markets, Facebook’s continued growth looks strong. Danny Meadows-Klue, head of Digital Strategy Consulting, explains why the big leaps in mobile are still to come, and why more brands will be adding Facebook to their media plans.
Becoming a public company driven by shareholders was a big wake-up call. Overnight the communications model changed from one where fans saw the content of the brands they liked, to one where the brands had to pay to play. Suddenly having a fan page was meaningless without having a strategy to drive traffic to it or taking its content to its audience. The gamble of risking a backlash from advertisers paid off, and it’s transformed the Facebook business model from a promise to a money-making machine on the scale of Google’s paid-search.
As for what happens next? The 24 month outlook is strong, because Facebook either holds most of the cards, or can afford to buy the ones it needs…
Facebook’s acquisition strategy
The social network now has three of the hottest new technology firms under its wing, with WhatsApp and Instagram proving a costly mobile insurance strategy worth $20bn combined (and an additional $2bn for virtual reality firm Oculus Rift). But this new breed of mobile social sharing platforms represents the future of communications, bringing with it the next generation of consumers. Facebook knows that this is a prize it cannot let slip to rivals- whatever the price.
The $19bn WhatsApp gamble may seem like a massive price, but one worth paying to keep Facebook safe. Facebook realised that building its own technology and waiting to win through gradual market adoption would take too long and be too high a risk in an industry where speed is critical. The acquisition is an insurance policy for the core business, giving immediate global leverage. It will be deeply integrated within the Facebook tools and messenger services as fast as their engineers can manage.
Buying Oculus Rift is more interesting, because the virtual reality operating system is about growing the scope of Facebook and not simply doing more of the same. How this will be incorporated into the business is far less clear, but given the many false-starts of the VR industry, the smart money will be backing Facebook to get it right.
Mobile first – lessons for every firm
The ‘mobile first’ strategy is paying off. The shift in Facebook’s developer’s focus to the small screen follows how most consumers use the platform, and the fast performance and brilliant app experience is all a result of putting mobile first. Expect to see more in-newsfeed ads and sponsored stories. Also expect more communications tools (WhatsApp especially) integrated into the mobile.
It’s still about advertising
For a free to use platform, the shock of many brands that they now have to pay to reach their audiences (including 90+% of their fans), seems strange. Once the audiences are large enough, every social platform finds ways to monetise, and the free exposures brands get today on Twitter, Pinterest and others platforms will also gradually fall.
Because Facebook’s Edgerank algorithm controls the editing of our newsfeeds, by adjusting the model, Facebook controls the amount advertisers will spend. Need more income? Simply change the rules and the organic reach of brand posts falls even further. It’s a money-making machine, and with most consumer brands now heavily committed to Facebook publishing, they have few choices in the short term than to simply switch their paid media budgets to fuel Facebook.
Facebook has created smarter and better ad formats, and has unlocked a neat blend of targeting, social recommendation and paid promotion. Simpler brand pages and ad products like auto-play video make Facebook’s media a serious contender to both paid search and display ad networks. Today the CPMs remain surprisingly low, but as savvy media agencies spot the opportunity, the price will rise as the spare capacity gets used up.
Ad revenue has been growing at 150% since its IPO, and US advertisers increased their budgets 40% in 2013. Facebook attracted a huge amount of advertising from major brands, including companies such as Samsung ($100m) Proctor & Gamble ($60m) Microsoft ($35m) Amazon, Nestle, Unilever, American Express, Visa, Mastercard and Coke all investing heavily in global-scale paid activity on the social network during 2013.
What’s more, according to Shareaholic, over 10% of all internet referrals come from Facebook, up from 7% share of market the previous year. This is 10 times the referral level of Twitter (1%) and 100 times the levels of LinkedIn and Google+ (less than .1% each.)
Despite this impressive list of brand endorsements and growth stats, Facebook's paid ads remain under scrutiny, with several research pieces indicating that 'fake likes' are still rife on the social network, potentially driving up the cost of legitimate marketing campaigns. Conversely, the social network’s organic reach for brand pages has been falling steadily, with the idea of ‘free’ advertising on Facebook is forecast to die out.
Having engineers at the heart of the business maintains an investment in product that most firms fail to follow through with. Learning lessons from the falls of the once giants like Yahoo and AOL, Facebook has kept engineering at the heart of the business and product development as a constant cycle of innovation.
From the addition of “trending topics” which hit the heartland of Twitter, to the obsessive focus on mobile, the development teams are unlocking a constant stream of innovations that strengthen the core platform.
On the internet nobody knows you’re a dog
The cliché from the 1990s digital industry feels like it’s now history, thanks to cookies, logged-in platforms, and the massive volumes of personal data people willingly (or unwittingly) share. Yet fake likes remain a curious phenomena and recent research suggest click farms continue to drive up the cost of legitimate social media marketing campaigns as advertisers seek legitimate likes amongst fakes.
This is a challenge Facebook hasn’t yet cracked, and although there’s no urgent pressure, like the Facebook spam in many D&E markets, it’s something the business will have to face up to. Sound familiar? It’s all vaguely reminiscent of the pay-per-click fraud challenges in the search engine ad sector over 10 years ago.
Beyond social media to connecting the world
Zuckerberg wants to connect the world. His ambitions lie far beyond Facebook’s core functionality, and this puts him on a collision-course with Google. While Google's core search-advertising business dominates, social-media's push into mobile and video ads offers the most competition Google has felt in years. Facebook has the potential to take a substantial amount of advertising dollars away from Google, although it certainly won't be easy.
Connecting the next billion people unlocks new markets and new ways of working, but with the capital infrastructure – whether drones or fibre – unclear, and the commercial value of those consumers being lower than the rich developed markets of today, Zukerberg is leaving himself open to a big gap between costs and revenues.
Here are a few of the recent Facebook case studies that impressed us.
Danny Meadows-Klue is the founder of the Digital Strategy Consulting group that advises brands and companies on their social media strategy. He is a Commissioner for the regulation of marketing in the UK, and President of the Digital Training Academy where his team train marketers on best practice for digital marketing, and design processes for organisations using digital channels. You can reach him at Danny@DigitalStrategyConsulting.com.