Facebook (NASDAQ: FB) combats pressure – both internally and externally – regarding the number of ad impressions on the flagship. It made several changes to the news feed algorithm that put pressure on user engagement and decided almost two years ago to stop increasing the number of ads in news feed. Meanwhile, there is a setback from the Cambridge Analytica debacle, which results in users potentially sharing and enjoying less.
Advertisement views on Facebook's flagship app fell 17% year-on-year in the second quarter among marketers sampled in Merkles Digital Marketing Report. Nevertheless, Merkle's advertisers still spent 40% more on Facebook ads than they did last year. In addition, Instagram has proven to be an extremely valuable source of additional ad inventory.
This is why Facebook investors do not have to worry about falling ad impressions.
Users click on ads like never before
Ad impressions may have fallen 1
Facebook's biggest focus in recent years has been to improve the return on investment for advertisers. This challenge has become much more difficult since Facebook no longer has control over the inventory's inventory. The fixed ad load makes it more vulnerable to user engagement.
The company's move to focus News Stream more on friends posts than Page Mail may have increased clicks that go to sponsored content, since users do not click on as much organic content from businesses. In addition, Facebook continues to roll out new targeting and creative campaigns to improve the odds of users who click on advertiser ads.
The increase in clickthrough rates is largely reflected in the price increase in cost per impression, which was 70% higher than the previous year. The rest of the increase in the average price stems from increasing demand, especially from smaller businesses.
Last year, Facebook showed an average price increase of 39% across all advertising platforms. Facebook should see a corresponding figure for the second quarter – maybe a bit higher. This is because Instagram is a growing part of the business and sacrifices growth in price for growth in impressions. Photo sharing appa showed a 10% decline in average ad price in the second quarter, according to Merkle.
Instagram is still in progress
Although Facebook is seeing a decline in ad impressions, the number of ads has seen Instagram explodes. Impression more than tripled year over year, according to Merkles data.
The growth in impressions is driven by user growth. Instagram reached 1 billion users by the end of the second quarter. It is up from 700 million at the same time last year. Instagram Stories also grows crazy, going from 250 million daily users to 400 million over the past year. And those users are becoming increasingly engaged on the platform.
At the same time, Instagram picks more ads into user feeds and between user stories. The rapid growth in impressions has kept the average ad price relatively flat (down 10% year-on-year in the second quarter), but many more advertisers are encouraged to experiment on the platform. In fact, Merkles data contains only data from companies that also announced last year. The total number of advertisers on Instagram is still climbing so ad impressions grow even faster than Merkles report suggests.
Most advertisers still use dramatically more on Facebook than they are at Instagram. Average revenue per user on Instagram was only 40% of it on Facebook last year, according to eMarketer. Both of these facts will change rapidly over the next few years, which results in a significant revenue growth for the parent company Facebook.
Although ad views on Facebook's core product fall, the company is still in good shape. The continuous improvements in the ad formats and news feeds have yielded better ads that marketers are willing to pay more for. And there is still a huge potential to earn Instagram.
Adam Levy owns shares on Facebook. Motley Fool owns shares of and recommends Facebook. Motley Fool has an information rules.