Facebook’s ad pricing increase
Earlier this year, Facebook, Inc. (FB) began redesigning its right-hand column ads to feature fewer but larger ads, making it more consistent with its News Feed ads. During the last quarter, the average price per ad for Facebook increased by 274% compared to the same quarter last year. Meanwhile, total ad impressions declined by 56%.
During the company’s earnings call, Facebook’s management explained, “The increase in the average effective price per ad was driven primarily by the redesign of our right hand column ads which resulted in larger, more engaging ads that delivered more value to marketers and thus had higher reflective prices.”
Before this redesign, News Feed ads had significantly higher engagement, click-through rates, and price per ad than right-hand column ads. But according to Facebook, user engagement and the ensuing ad pricing increase in the last quarter were primarily driven by the redesign of its right-hand column ads. Interestingly, Twitter Inc (TWTR) credited its robust revenue growth in 3Q14 to the increase in ad revenue per thousand timeline views. This is the main metric that Twitter uses to measure user engagement.
Right-hand column ads less valuable
Although the right-hand column ads helped Facebook increase its ad pricing, the number of total ad impressions has declined, as already noted. One reason for this decline is obviously that the larger size of the ads shown means there’s less space available. But there’s another reason why the number of ad impressions is likely to decline in future.
Right-hand column ads are not part of mobile due to limited space. And it’s a well-known fact that the usage on mobile is increasing at a faster rate than desktop. As a result, right-hand column ads will become less valuable for Facebook. Facebook has done well to challenge Google Inc. (GOOG)(GOOGL) so far in this space. The company will have to continue to innovate if it’s to keep gaining share in the display advertising market. For more on this topic, read Why mobile platforms are an important revenue driver for Facebook.
According to a report from eMarketer, and as the chart above shows, Facebook had about an 18% share of the U.S. display advertising market in 2013. Surprisingly, Google was behind Facebook because Google still generates the majority of its advertising revenues from search advertising rather than display advertising. Yahoo! Inc. (YHOO), AOL, Inc. (AOL), and Microsoft Corporation (MSFT) are some of the other smaller players in this market.