Facebook's Block on Ad Blockers Is Important for Investors

By Markets Fool.com


Image source: Facebook.

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Ad blockers have grown in popularity over the past year, and companies that are heavily dependent on digital advertising for their revenue are doing everything in their power to combat the trend. Facebook (NASDAQ: FB), which generates 97% of its revenue from advertising, is no different. Earlier this week, the company inoculated ad blockers on its desktop website by making advertisements look the same as the rest of its content to a web browser.

Facebook generated only 16% of its ad revenue from desktop ad impressions last quarter, as it crossed over 1 billion daily active users on mobile. Still, desktop represents an extremely important part of the business. Here's why Facebook's block on ad blockers is big news for investors.

How big of a problem are ad blockers?

A recent survey from IAB found that 26% of the U.S. internet users who responded use an ad blocker, and another 17% are likely to use one within the next six months. eMarketer expects the growth of ad-blocking software users in the U.S. to accelerate this year to nearly 70 million (63 million on desktop). Another survey has found similar percentages in the United Kingdom.

Ad blocking is most often used by the most valuable ad cohorts -- millennial Americans. Millennials are a coveted demographic for brand advertisers, as establishing brand loyalty at a young age provides a long runway for future sales. The U.S. is Facebook's most valuable market. Last quarter Facebook brought in $13.74 per users in the U.S. & Canada, 3.7-times its global average.

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Ad blocking is growing in use on both desktop and mobile browsers, but there's no software that can prevent ads from popping up within mobile apps. Since most of Facebook users access its platform through mobile, that means the majority of Facebook's users are still seeing ads most of the time. Last quarter, 92% of monthly users accessed the social network through mobile, and 91% of daily users were on mobile. Eighty-four percent of its advertising revenue came from mobile as well.

A $4 billion business to protect

Even with 84% of ad revenue coming from mobile last quarter, Facebook still generated around $1 billion in ad revenue on desktop quarterly. And while the shift to mobile is seen as a boon for Facebook's average ad prices, which climbed another 9% year over year last quarter, desktop viewers are still, in all likelihood, more valuable.

Not only do desktop ad impressions typically convert better than similar ads on mobile, thus costing more, but Facebook also benefits from the addition of right-hand column ads on desktop. It's those right-hand column ads that drive down average ad prices on desktop compared with mobile, but they're incremental to Facebook's regular news-feed ads. That makes a minute spent on Facebook's desktop site more valuable than a minute spent on its mobile app.

That's assuming Facebook's visitors aren't using ad blockers.

Fighting for ad impressions

During Facebook's second-quarter earnings call, CFO Dave Wehner told analysts that they should expect a slowdown in ad revenue growth as its nearing saturation on its ad load. Ad impressions increased 49% year over year despite just a 17% increase in daily users. Facebook can't keep up that ad impression growth even with strong engagement improvements and continued user growth.

Shutting down ad blockers provides incremental high-value ad impressions. It also stymies the loss of ad impressions on desktop. While it won't provide a huge bump, Facebook is fighting for as many ad impressions as it can squeeze out at this point.

Facebook certainly has other sources to grow ad impressions though. Instagram just started expanding its advertising program about a year ago. The switch to an algorithmic feed (similar to the news feed) from a chronological feed should help Facebook squeeze as many ad impressions out of the platform as possible. Facebook also has the vast green field of Messenger and WhatsApp, should it choose to place ads in those apps.

The company is taking every opportunity it has to continue growing ad revenue. Even with more of its users spending more time on mobile, there's a lot of value it'd be throwing away by not stopping ad blockers. The move should help Facebook continue increasing ad impressions and average price per ad even as it continues to inch closer to saturation.

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Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends 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.