Does Facebook Have a User Engagement Problem?
Facebook (NASDAQ: FB) has found itself in the midst of a lot of controversy over the past year, and users have noticed. Time spent on the social network, among Americans, fell by 7% year over year, according to data from Nielsen. That follows a survey from Common Sense Media that found just 15% of teenagers consider Facebook their go-to social network, down from 68% in 2012. And over the summer, Pew found that nearly half of millennials deleted the Facebook app from their phone at some point in the last year.
If you focus solely on the headline numbers, you'd think Facebook's business is heading south in a hurry. But looking at the bigger picture can give investors additional confidence that Facebook (the company) is moving in the right direction despite its struggles.
We've heard this straight from the horse's mouth
The first thing investors should consider is that Facebook already told investors that it saw a decline in time spent on its flagship app during the fourth quarter. Specifically, the company's fourth-quarter earnings release included a note saying, "In total, we made changes that reduced time spent on Facebook by roughly 50 million hours every day." Management clarified on the earnings call that the drop equates to about a 5% decrease, roughly in line with Nielsen's data.
The decline in time spent stems from several changes Facebook made to news feed to reduce the spread of misinformation and disinformation as well as reduce the focus on viral videos. The changes should result in higher quality time spent on Facebook, with users consuming content unique to the platform.
Moreover, Facebook can't do much to monetize time spent watching videos in news feed or reading news articles (fake or legitimate). So, if that's what's causing a decline in engagement, it should have a very minimal impact on Facebook's financials.
The numbers are actually getting better
While a 7% drop in time spent on Facebook sounds scary, it's certainly better than the 18% drop Nielsen's data showed six months ago. That change is despite Facebook facing its biggest backlash in the last six months following the revelation of its mishandling of Cambridge Analytica.
Time spent is still moving in the wrong direction, but users seem to be nearing the limit of how much they're willing to give up using Facebook.
Facebook's other apps are growing
Time spent on Instagram continues to climb, up 38% year over year, according to Nielsen. While teens aren't so hot on Facebook, they love Instagram, according to the Common Sense Media survey. 71% of 18 to 24 year olds use Instagram, and the percentage of Americans using Instagram increased from 28% to 35% over the last two years.
While the growth in time spent on Instagram doesn't entirely offset the declining time spent on Facebook, it's a great sign. Instagram is still relatively under-monetized compared to Facebook's flagship app, so incremental time spent on the app leads to outsized increases in revenue for Facebook.
Facebook is an international company
The survey data in these headlines focuses primarily on Americans. While the U.S. is Facebook's most lucrative market, it has about 2 billion users outside of the United States. Facebook's position in emerging markets such as India present a massive opportunity for growth as it capitalizes on the secular trend of growing digital advertising spend.
Facebook's WhatsApp is also a significant opportunity for Facebook, particularly in international markets, where most of its 1.5 billion users live. The company is still in the early stages of monetizing WhatsApp, but the stories product attached to WhatsApp presents a great opportunity for Facebook to capitalize on its advertising expertise.
Facebook is out-earning time spent on its platform
Facebook's share of digital consumption totals 15.2%, according to Pivotal's Brian Wieser. Meanwhile, Facebook's share of digital ad sales is about 23%. In other words, Facebook is better at monetizing time spent across its platform than most of its competitors.
And there's good reason for that. Facebook has a larger user base than nearly anyone else, which gives it a convenience factor for both small and large advertisers. Additionally, Facebook is able to use its large user base and the still massive amount of time spent on its platform to provide targeting data that's better than what most of the competition can provide. That enables marketers to achieve higher return on investment with Facebook ads, pushing average ad prices higher.
Investors should take note of the numbers from these surveys, but it's also important to look at the big picture of where the decline in time spent is coming from and how it actually impacts the overall business. In the case of Facebook, it's doing just fine despite losing a few million hours in time spent. Moreover, the numbers are starting to stabilize and move back in the right direction.
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