Making Sense Of A New Facebook

January 23, 2018

How do you boil a frog? Slowly. And this is exactly what Facebook has now done to brands, businesses and publishers. The water has boiled. The frog is now cooked. (And in case you have not caught on…you are the frog).

We predicted this would happen…I hate to say it, but we told you so.

Zuckerberg shared recently that Facebook is making changes to the News Feed to prioritize content from friends over content from brands, businesses and publishers. This is part of an effort to encourage time well spent on the platform and in many ways, redefine how over 2 billion people use Facebook. Facebook’s stock price went down 5% immediately when the shift in direction was shared.

This change should not be taken lightly. While Facebook does update its News Feed algorithms regularly, as Adam Mosseri, Facebook’s Vice President of Newsfeed, shared last week, “this one is bigger than the average tweak. It’s not a tweak”.

I’ve written this essay to share my perspectives, research, predictions, and guidance for leaders in the digital advertising industry on how to make sense of Facebook now. This post is my longest yet, over 5,000 words, as this is a complex topic that needs to be well understood. So please take your time reading this post, it’s not one to skim like a Facebook News Feed.

Facebook Has Finally Had An Awakening

Last year was challenging for Facebook.

Source: Marketwatch

Despite stellar financial performance (they added $159 Billion to their market cap in the past 12 months alone), it does not feel as though anyone at Facebook is particularly proud of how the business has grown in the past year. I guess they have learned that the journey matters as much as the destination.

They faced seemingly endless challenges. Be it having to testify on Russia’s potential involvement with the US elections using their platform, users buying Facebook ads to target those who identify with anti-semitic views or the very sad live broadcasts of people committing suicide on the platform.

Source: Getty Images

I think Facebook has finally had an awakening. And it is manifesting itself via a fundamental change to its business model going forward.

Historically, it’s business model has been to harvest people’s attention (regardless of the implications to society, democracy, mental health or well-being) and monetize it via an advertising marketplace where the highest bidder wins (regardless of who the advertiser may be).

Within the media industry, we talk a lot about making advertising environments ‘brand-safe’, or safe for advertisers. Facebook is not a ‘user-safe’ advertising environment right now, as anyone can access and target users based on personal data. They’ve proven to have no effective safeguards in place.

Now I tried to quantify Facebook’s business model as it relates to user attention and came to the estimate that Facebook makes approx. $0.40 per hour of time spent on the platform (in the US & Canada).

A few relevant stats (source: Facebook Q3 Earnings):

  • $10.33 billion in quarterly revenue ($5.03 billion in the US & Canada)
  • 2.072 billion monthly active users; 1.368 billion daily active users
  • $5.07 average revenue per user globally; $21.20 for users in the US & Canada

Time spent on Facebook as reported by Comscore is 35 minutes per day, other sources cite that time may be as high as 55 minutes per day. I took the conservative estimate of 35 minutes to calculate the average revenue user hour on the platform to be $0.40 USD (for US & Canada).

So for every hour you spend on Facebook, they make $0.40 and you may get feelings of FOMO (fear of missing out), isolation, loneliness and boredom in return. I’ll share more of my observations later on the implications to average users, however first, let’s talk about the implications to the industry.

Breaking Down Facebook’s Business Model

To really understand the business impact of this shift in Facebook’s mission, we first need to understand their business model, which is primarily driven from advertising revenues.

Here is a simplified view of the key inputs into determining revenue for any ad-supported business model:

Total revenue is a combination of four key inputs:

  • Active users: the number of monthly unique visitors or users on the platform.
  • Time spent: how long does each user on average spend on the platform.
  • Ad density: the average number of ads shown to each user.
  • Ad price: the rate each advertiser pays on average for each advertisement.

Facebook has seen continual growth in its stock price, total revenue, average revenue per user, time spent on the platform, volume of ads delivered and user base. That’s all nice and all, but the only growth the industry will be now paying attention to is the price to advertise on the platform.

An important observation I’ve had on Facebook’s growth over the past few years is that revenue has outpaced user growth.

Source: Facebook Q3 Earnings

Over the past two years, Facebook’s monthly active users have grown 34% from 1.5 billion in Q3 2015 to now 2.1 billion in Q3 2017. However their revenue has grown 129% in this same time period, from $4.5 billion per quarter to now $10.3 billion per quarter.

Average quarterly revenue per user has grown 71% from $2.91 in Q3 2015 to $4.98 in Q3 2017. How did they achieve this? A combination of users spending more time on the platform (creating more advertising inventory per user), ad density increases (number of ads shown to each user in each session) and price per ad increasing.

Facebook’s Accidental One-Two-Punch To Industry

There are 6 million businesses that advertise on Facebook today. When I refer to industry, I’m referring to these 6 million businesses. The first hit to be felt by industry will be from decreased visibility of their organic posts as a result of the News Feed algorithm change. This will be immediate. I have heard anecdotal reports that some brands and publishers outside the U.S. have already noticed this decline in recent months, likely from Facebook testing alternate News Feed algorithms.

Though, we think the second hit will be even bigger.  

“Now, I want to be clear: by making these changes, I expect the time people spend on Facebook and some measures of engagement will go down,” shared Zuckerberg last week.

As Facebook looks to make their product less addictive to encourage time well spent versus more time spent, overall usage on the platform will decrease. This second hit will be slow, continuous and hard. With potentially less people likely spending less time, there are going to be fewer opportunities for brands, businesses and publishers to get reach for both organic and paid posts.

The available supply will decrease, which means only one thing: the price to advertise on the platform is about to skyrocket.

Facebook Ad Prices Could Increase By 79%

Now the game has changed. Zuckerberg expects that time on the platform will decrease. Ad density will likely stay the same. Assuming Facebook intends to continue to grow revenue, then their current business model points to only one change happening: the price to advertiser will skyrocket.

Let’s now understand this in real terms and make some predictions.

In this above model, the baseline “Current” is based on Q3 2017 data. Revenue and Active Users are from Facebook’s quarterly earnings. Time spent on the platform is a previous estimate reported from Comscore (which is 35 minutes per day, which works out to 53 hours per quarter, per user). Ad density is the number of ads per hour, this is a guess but does not matter what it is specifically as we are assuming that ad density stays static (in that Facebook will not be able to show you more ads per hour you spend on its platform). The ad price is reverse-engineered from taking the total Revenue divided by Active Users, Time Spent and Ad Density. And similarly, ad price (on an effective cost-per-thousand impressions basis) does not specifically matter as we are looking at the % change under different scenarios (relative vs absolute change).

Here is the forecast under three different scenarios of how the ad price may change.

I have assumed modest user growth (in line with historical trends), declines in time spent from 10% to 20% over the next year and static ad density. Based on these assumptions, the price of advertising on Facebook could go up by 25% within 3 months, 48% within 6 months and 79% within 12 months.

I think that’s a big deal and it will have a massive impact on the industry. Although all of this is being discussed and debated within the context of facebook.com as their core product, Instagram will surely be next as it has an even bigger leap to make for user attention to be considered time well spent.

Facebook Becomes The New AdWords

Total digital ad spend in the US this year will be $94 billion with the vast majority going to Google and Facebook. Another less used industry term for the “duopoly” of Google and Facebook is performance advertising. Both companies have the three critical ingredients that make performance advertising effective and successful:

  1. Massive reach (such that they can find anyone who is online)
  2. Relevant data (be it personal, demo or intent-driven)
  3. User attention (on mobile devices and more broadly)

I think Google and Facebook’s dominance in the digital ad industry is more of a reflection on the demand for performance-driven advertising. In the IAB’s annual PwC Internet Ad Revenue Report, they report that approx. 65% of digital ad revenues are priced on performance-based pricing models (e.g. cost-per-click, cost-per-action, cost-per-lead). This has been steady over the past several years.

Source: IAB

With Facebook’s incredible user data, proven audience targeting capabilities and massive reach, I believe they will become the new Adwords (Google’s search advertising product). Not that they will replace or enter the search advertising business, rather they will become seen primarily as a lower-funnel performance marketing and advertising platform. Total digital ad spend in the US this year will be $94 billion, with $32 billion of that going to Google’s Adwords search advertising business. That’s 34% of the entire US market.

Performance marketers have different objectives than brand marketers. Here is a simple marketing funnel, showing the different characteristics for awareness, intent and action objectives.

Source: Hootsuite

It is more profitable for Facebook to focus on performance advertising as their primary business model. The macro-level shift in their mission will cement the platform’s position in the marketing funnel. With them having a change of heart on video (more on this below) and overall user attention likely decreasing, I do not believe they will be as focused on building ad products and solutions for upper-funnel brand marketers.

Facebook advertising (like Google AdWords) is a marketplace where businesses have to place “bids” (like an auction) to “win” access to a user. Performance marketers generally pay more than brand marketers. As they are driving lower funnel activities, and have user data to target from, they are willing to bid higher rates. This will make it more difficult for brand marketers to get in the game (similar to Adwords today).

Redefining Social Engagement

“We want newsfeed to be a place where people have conversations, where they connect with people”, shares Facebook’s Adam Mosseri. Over the past decade, most businesses have measured social engagement based on likes to posts and follows on brand pages, both of which will have little to no value now. The days of a post from a brand, business or publisher going “viral” and getting free organic reach because it’s popular (measured by way of likes) are over. Likes do not equal engagement anymore.

The issue for publishers is that Facebook may use comments as the measure for conversation, yet they only see the comments happening on their platform. A big part of the conversation happens outside of Facebook, be it on other social platforms (like Twitter) or directly on a publisher’s page (via their on-site comments widget).

The issue for brands is that people want to have conversations with other people, not businesses. Twitter is the only place that has seen customers have conversations with businesses, and it’s largely used as a customer service and issue escalation channel. Plus, most brands do not enable comments on their posts, yet another reason why they will receive even less organic reach under the new paradigm.

A Change Of Heart On Video

Just how big is video on Facebook? Well, as of two years ago, over 100 million hours of video were watched everyday and over 500 million people watched video daily. Facebook spent over $50 million funding publishers to create video in 2016 and there were reports that they would be willing to spend up to $1 billion on original video content this year. Social video first publishers like NowThis, The Dodo, Tasty and Ladbible who have billions of monthly video views will be impacted, alongside traditional brands like CNN, Food Network and The Daily Mail who all boast impressive video stats (which is about to change).

They have had entire teams dedicated to integrating video into every part of the Facebook experience. Here is a promotional video shared in February last year announcing a number of new features.

Well, Video was nothing but an experiment for Facebook and their change of heart is felt strongest in Zuckerberg’s own words.

On July 27, 2016, he shared in an earnings release: “We’re particularly pleased with our progress in video as we move towards a world where video is at the heart of all of our services.”

And only 18 months later, on January 11, 2018, he shared in a public post: “Passively reading articles or watching videos — even if they’re entertaining or informative — may not be as good…But too often today, watching video, reading news or getting a page update is just a passive experience.”

Many industry leaders will be scratching their head in the coming months, wondering how they fell for this one.

“[With] l less video…you tend to just sit back and watch it. And while you’re watching it, you’re not usually liking or commenting or speaking with friends.” said Adam Mosseri last week. Facebook will likely still prioritize personal video from friends, however, those become very hard to monetize and are unlikely to be littered with ads.

Time Well Spent

“Just scrolling through your Facebook feed passively reading or watching without interacting with others tends to make people feel worse” shared Lauren Scissors, head of News Feed Research at Facebook, in a video posted last week.

Facebook has set a vision that attention on the platform should be time well spent. It is a noble vision that has the potential to bring greater balance to how social media is adopted in society. Facebook has the potential to set an example for large platforms taking responsibility over the mental health and wellness implications of their products and services. This is new territory and the ecosystem should be prepared for lots of experimentation in true Facebook style. That means only one thing: continual change.

I can’t help but be skeptical about Facebook’s ability to change its product significantly enough to improve the mental health and wellness of its users. I think it is kind of like a tobacco company saying “we’re going to make our cigarettes healthier”. There is an addictive nature to the platform which explains why its been so successful at cultivating people’s attention. However, that’s also why it may be causing mental health and wellness issues for its users.

Last year, the Royal Society for Public Health in the UK conducted a research study where they interviewed over 1,400 teenagers on their social media habits over several months. They surveyed them on 17 different attributes of mental health and wellness. They concluded that current adoption of platforms like Instagram, Snapchat and Facebook have clear negative mental health implications based on current usage behavior.

Research has shown that lower mental health and wellness on the platform is from envy and social comparison. Now that Facebook will prioritize posts from friends, and friends have a habit to share only good news, the risk of even lower mental health and wellness is high.

Time may be best spent not on Facebook after all.

A More Connected World That No One Asked For

Our world is more connected than ever before, and perhaps more than it needs to be. A key assumption for Facebook to be successful in its redefined mission is that there is a big need for people to be more connected to one another than they already are.

Source: Paul Butler

Facebook will prioritize content from friends in its feed, however, I wonder how interesting that content will actually be for everyone else. While technology can be used to make it easier and more efficient to communicate with people you know, I do not believe that technology can make people more interesting than they actually are or more connected to others than they actually want to be.

On an average day in New York, I’ll see people glued to their phones in the subway, while walking down the street or even while sitting at a  fancy restaurant. If Facebook is a reflection of current behavior, I don’t know how much more connection people actually want or need with one another.

Source: Cohesion Arts

Today, an IRL (in-real-life) conversation over dinner is often interrupted by people choosing to browse Facebook on their phone in the hopes to finding something more interesting than talking to each other. Once Facebook becomes a space for people to primarily talk to each other, what’s to say they won’t interrupt the experience by looking elsewhere outside of Facebook for something more interesting than talking to other people.

I fear that Facebook may be underestimating the demand for more human connection online. The unmet demand for people wanting to spend more time talking to other people is tiny. It appears that we are constantly trying to escape being present with one another and choosing instead to distract ourselves with more interesting information.

Another Way To Deal With Fake News

The past year has made Facebook’s fake news problem very obvious to the world, and finally to Facebook themselves.

The risks of not dealing with this problem have continued to mount. Last year, they rolled out a number of new tools to help users identify and flag fake news.

Source: Factcheck.org

In April 2017, the BBC reported that Germany’s government had approved plans to fine social networks up to 50m euros if they failed to remove illegal content within 24 hours. Other governments in Europe have also started to make plans. As such, the financial risks of the fake news problem are continuing to mount.

Facebook understands that the problem is not limited to businesses running paid advertisements potentially promoting fake news but equally important, the organic potential on its platform. On Facebook’s Q3 earnings call, Sheryl Sandberg shared “Because the interference on our platform went beyond ads, we’re also increasing transparency around organic content from Pages. We’re looking at ways to provide more information about who is behind a Political or issue-based Facebook Page. We believe this will make it harder for deceptive Pages to gain large followings and make it easier for us to identify malicious activity.”

The recent change Facebook is making to its News Feed is another way to deal with its fake news problem. Show less news overall to begin with. Limit the organic reach of any news (real or fake). While that means that less real news will be seen, it also means that less fake news will be seen.

Who Is Really In Control?

Facebook is increasing the amount of content from friends and family in its users News Feed and reducing the amount of content from businesses, publishers and brands. How does Facebook know that this will lead to be time being well spent on its platform?

One’s filter bubble caused by only seeing and interacting with people (and perspectives) that you agree with could be very damaging for our society. Users will begin to see a more extreme view of their world, versus a more balanced one. Thanks to personalization.

Source: Facebook

In a post on Facebook’s engineering blog, they explain the backbone technology used to recommend items to more than a billion people at scale. “Collaborative filtering (CF) is one of the important areas where this applies. CF is a recommender systems technique that helps people discover items that are most relevant to them. At Facebook, this might include pages, groups, events, games, and more. CF is based on the idea that the best recommendations come from people who have similar tastes. In other words, it uses historical item ratings of like-minded people to predict how someone would rate an item.”

It’s also worthwhile to understand how Facebook’s News Feed works. Here is a brief video the head of News Feed explaining it.

The real question begging to be asked is who is really in control? Is it Facebook’s engineers or is it the algorithms? I think the recent year has shown us that the algorithms are the ones in control. They have been programmed to optimize for two things: Facebook’s revenue and user attention its platform. And they have done a remarkable job. Kudos to the engineers for designing, building and scaling world-class algorithms that do as they are told.

Now Facebook is telling us that they are telling the algorithms to do something different. Changing how 2 billion people place their attention is not easy and to think there is a one-algorithm-fits-all-needs I think is short-sighted.

We are used to having choice. Be it where we live, the stuff we buy, the clothes we wear, the food we eat or the friends we keep. We generally feel in control of our lives through the choices we make.

An exception to this is Facebook’s algorithm, which is making choices on our behalf. And now Facebook has decided to change the choices they are making on our behalf because they did not like the unintended consequences of the previous choices they made for us. I think these changes will have just as many unintended consequences.

I don’t know who is actually in control anymore of the attention for 2 billion people. The people at Facebook? An algorithm? Or its users?

Source: TechCrunch

A New Facebook For Wall Street

Let’s now assume that Facebook successfully makes this transition from being an attention harvesting platform to a human connection platform that promotes positive mental health and wellness for its users.

Facebook will look very different. It may still have the breadth of reach that it enjoys today, however, the time spent on the platform will decrease and the attention is given to content shared by brands, business and publishers will be even less.

I think at some point soon, Zuckerberg will start to aggressively diversify away from its core advertising business (like Google’s founders have been for a while now, evidenced by their investments in dozens of new unrelated areas). Facebook could enter a number of industries, including cloud computing, artificial intelligence, enterprise software, home automation or mobile commerce.

Source: NBCUniversal

To do this, investors in Facebook should be prepared to see a Jeff Bezos like philosophy to profits: put them back in the business versus giving them to shareholders. A quick look at earnings-per-share for each of Amazon and Facebook over the past few years is telling:

Facebook EPS trend: past 5 years

Source: YCharts

Amazon EPS trend: past 5 years

Source: YCharts

Amazon has taken a deliberate strategy to reinvest profits immediately in the business with less regard to paying dividends to shareholders. I believe Facebook will take a similar strategy as they explore new industries outside of advertising to invest in.

It’s clear there’s one industry they won’t be entering: publishing. They have learned their lesson and I think one day will be glad to no longer have the weight of responsibility (and distraction to their mission) that comes with being the starting point for how society gets informed, inspired and entertained.

Zuckerberg has already pledged 99% of his wealth to charity, which is an admirable act of leadership that sets the tone for what can be expected of those who have accumulated more financial wealth than they personally require. This act also signals Zuckerberg’s relationship with financial wealth: not a strong desire to accumulate it.

Source: Getty Images

Where he may not be driven by further accumulation of personal financial wealth, one thing has been clear: he is driven by control. A few months ago, he posted: “Over the past year and a half, Facebook’s business has performed well and the value of our stock has grown to the point that I can fully fund our philanthropy and retain voting control of Facebook for 20 years or more.” This was shared in context of reverting a proposal he made to further increase his tight control on the company in a future scenario if he had sold most of his shares (to fund philanthropic efforts).

Facebook’s future is really based on what Zuckerberg decides he wants to do. The Board cannot tell him what to do. Shareholders cannot replace him. The governance structure is unique and uncommon for most public companies. In the case of Facebook, shareholders will soon find that their financial interests are not aligned fully with Zuckerberg’s. Let’s hope that society’s interests are though.

Advice: Develop A Facebook Strategy

Given our focus on helping premium publishers succeed, I’ll focus most of my specific advice to this part of the industry.

Although short-term there will be pain felt by publishers, I think Facebook’s awakening and business model change is going to be a breath of fresh air for publishers and create the space (once again) for new products, models and solutions.

As I wrote in a recent post, I remain surprised by how few publishers have a clear strategy for Facebook. There are three specific things that every publisher should be thinking about:

  • Plan B for distribution: plan for a world where you do not have any organic reach on Facebook. I predicted in a post last fall that this may happen in the future with Facebook choosing to charge a ‘toll’ to businesses, brands or publishers to access its users. Well, it looks like this is happening far sooner than I had predicted. You need a new audience distribution strategy.
  • Support brand marketers: see this as an opportunity, as top-of-the-funnel brand marketers will be hit even harder than publishers. The organic reach brand marketers have will go to zero and they will be left with no option but to purchase advertising. Ad rates are going to skyrocket on Facebook and lower-funnel performance marketers will win (similar to Google search). Brand marketers will be looking for an alternative to Facebook to reach their audiences and publishers can fill that void.

Note: publishers who rely on Facebook for audience extension and branded content distribution will soon see that they cannot afford to use the platform, as they will be outbid all day long by performance marketers.

Source: Polar

  • Time well spent: brands and publishers should think hard about whether the time  users spend  on their sites is time well spent or not. I think it will only be a matter of time before Facebook weighs in, and if they decide that when a user visits your site, it is not time well spent, they may not direct as many users to your site.

Now is the time for publishers to invest in a growth strategy given the changes Facebook is making. The worst thing you could do is “wait and see”.

Finally, This Comes As No Surprise

If you cannot tell yet, I personally agree that this will have a massive ripple effect on the industry and the signs have been clear to me for some time that this was coming. I hate to say it, but I told you so.

Last summer, we published a 20-page whitepaper, How To Boil A Frog, providing background and context on how Facebook has been slowly killing distribution for brands, influencers, publishers and retailers on its platform, and has been benefiting handsomely for those moves.

We also have explained in detail how Facebook’s ‘handshake’ tool for branded content is not a very friendly handshake, as Facebook created a way for brands to bypass publishers and spend directly on the platform to boost publisher posts they are tagged in.

And last fall, we introduced the vision of “Plan B”, our prediction that organic reach on Facebook will disappear and recommendation to have a back-up plan as to how you will reach and engage with your audiences.

The above links provide some relevant background and context if you have not seen it already.

One book I thoroughly enjoyed reading last year was Tim Wu’s Attention Merchants. It’s a well-told in-depth look on the business of harvesting attention over the past 100 years.

Regaining Trust: Where Facebook Goes From Here

Facebook has a trust issue. There is a massive lack of trust with users and industry.

Users have trusted Facebook with their attention and Facebook has gone and monetized the attention at any expense, without regard for basic human principles like mental and emotional safety.

The industry has come to rely on Facebook as an efficient marketing channel to reach and engage their customers and Facebook has pulled the rug from under them.

Everything changes and Facebook’s role in society is now changing as well.

Kunal Gupta is the Founder & CEO of Polar, a technology platform provider whose mission is to enable a business model for premium content. Polar’s partners include major publishers such as Conde Nast, Oath, The Telegraph, News Corp, Gannett and Fairfax Media. Polar has offices in New York, London and Sydney and is headquartered in Toronto.

Kunal is passionate about finding calm and focus in a modern era. Kunal is on the board for CAMH, Canada’s leading mental health hospital and research organization. He writes regularly on the topics of leadership, mindfulness and technology culture on his blog at findfocus.today.

You can connect with him on LinkedIn.

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