Can Facebook Quadruple Ad Prices Again?

By Markets Fool.com


Facebook ad prices are trending up. Can they continue? Source: Facebook

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One of the most under-reported metrics about Facebook in the last year has been the phenomenal increase in its ad prices. Facebook's average ad price increased 335% year over year, according to the company's fourth quarter report.

Of course, that number doesn't tell the whole story. Ad impressions declined significantly in 2014 due to the shift to mobile devices (where the right-hand column ads don't exist). But with 1.39 billion monthly active users, user growth will only continue to slow. Facebook noted in its annual report that "Historically, our user growth has been a primary driver of growth in our revenue."

2015 could see user growth fall into the single digit percentages, in which case increases in ad price become even more important, especially in its more saturated markets like North America and Europe.

Stabilizing ad inventory
Facebook has been dealing with declining total ad impressions, attributable primarily to the platform'smobile user growth. Even more concerning, the mobile user segmentcontinued to outpace overall growth in 2014, growing twice as fast as overall user growth.

As mentioned, Facebook also made some changes to its right-hand column ads for those users who still log onto its web page. It increased the ad size and reduced the total number of ads per page impression.

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As a result of those actions, Facebook displayed 65% fewer advertisements in the fourth quarter compared to the year before. It's important to note that this decrease has nothing to do with decreased engagement or slowing user growth. Time spent per day across Facebook's services (excluding WhatsApp) increased 10% year over year.

Facebook's ad inventory should start to stabilize in the second half of 2015. At that point, increasing ad prices will become significantly more difficult, but COO Sheryl Sandberg is confident the company will continue to see consistent increases in ad revenue for the foreseeable future. That's particularly important in North America and Europe, which made up about 75% of the company's total ad revenue in 2014 but saw user growth slow to just 5%.

Marketing dollars still haven't caught up with mobile usage
Sheryl Sandberg pointed out that the opportunity for Facebook to grow ad revenue in the U.S. is when ad dollars catch up with engagement on mobile. Ad spending typically lags engagement because advertisers want to learn what works and what doesn't before investing heavily in a medium. Facebook offers some of the best tools for advertisers to measure ad efficacy and ROI, which it hopes will speed up the transition.

Sandberg pointed out that mobile gets 25% of consumer media time, but only 10% of ad spend. For every $1 spent on print advertising, just $0.07 is spent on mobile. Considering the amount of feedback advertisers can receive via Internet advertising compared to traditional print, those numbers don't really make sense. As such, there's a lot of room to grow and attract more ad dollars to Facebook's platform.

Within mobile, Facebook still represents a small percentage of what advertisers are doing. Sandberg believes the company represents "an under-investment in terms of where [advertisers] can reach their consumers." The company's apps (Facebook and Instagram) currently account for about 20% of users' time on mobile, and Facebook provides significantly better targeting data compared to the competition. For 2015, eMarketer projects Facebook will take just 16.7% of mobile ad spend in the U.S.

So there's a significant opportunity for more ad dollars to flow into mobile in the U.S., and for Facebook to take a larger share of those ad dollars while inventory remains relatively stable. As a result, ad prices should continue climbing, even in the second half of the year.

Breathing room for Asia and the rest of the world
While Facebook might not be able to quadruple ad prices again in the second half of next year, the flow of ad dollars into mobile and the potential for Facebook to gain an outsized share of those ad dollars bodes well for its ad growth in the U.S. and Europe. Overall, eMarketer expects mobile ad spend to increase 54% in 2015, excluding China.

That leaves plenty of wiggle room for Facebook in Asia and the rest of the world, where ad revenue growth has been slower despite faster user growth. Facebook is still working on attracting more advertisers in those regions. There's a tipping point where ad demand outstrips ad supply, resulting in significant increases in average ad prices. Facebook hasn't yet reached that level in emerging markets, but there's no reason to believe it won't eventually.

The article Can Facebook Quadruple Ad Prices Again? originally appeared on Fool.com.

Adam Levy owns shares of Apple. The Motley Fool recommends Apple and Facebook. The Motley Fool owns shares of Apple and Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.