性视界

Facebook is the world鈥檚 most popular social app and website and has amassed 1.86Bn MAU [1]. In this post, I would talk about Facebook鈥檚 Ad platform through which it monetizes its huge user base.

Source: Blog writer

Facebook鈥檚 ad platform has 2 sides:

1. Publishers: These creates ad inventory or 鈥渟lots鈥� [2] on web pages and mobile apps where ads are聽shown. Publishers have many users and ad requests are generated when a user visits the publisher鈥檚 website. Unsurprisingly, the biggest publishers on Facebook鈥檚 ad platform are聽Facebook properties (like Facebook app, Instagram). However, Facebook has also opened its ad platform to 3rd party websites and apps through Facebook Audience Network [3], thereby, increasing the ad platform鈥檚 reach
2. Advertisers: Advertisers creates ads that are then displayed on websites and apps. These include brands like Nike, Samsung but also apps like Uber,聽who want to show an ad to the user so that users聽can perform some action on the ad (like downloading the Uber app)

Source: Facebook page of Blog writer; Techcrunch.com

Value creation:

Facebook has lots of user data which allows its to provide highly targeted advertising. It also has worldwide scale, which allows advertisers to run worldwide campaigns. This utility of online ad platforms has been responsible for the explosive growth in the online ad business. Online ad spending is poised to overtake TV ad spending [4].

Source: eMarketer

Value capture:

Facebook captures value from its ad platform by charging advertisers for its targeting and ad delivery technology. This is done in 2 ways. First, Facebook is a publisher on its own ad platform. This means that Facebook captures every $ that comes from the advertisers for ads shown on its properties (as it is both the publisher and the technology provider). For ads shown on 3rd party websites and apps, Facebook keeps a percentage聽of every $ from the advertiser (this % depends on the publisher鈥檚 bargaining power but is typically 40% for the platform owner). Facebook makes almost $1Bn annually from ads that it shows on 3rd party websites and apps and $25Bn from ads that it shows on its own properties [5].

Source: Annual reports of Facebook, Google, Yahoo, Twitter, Tripadvisor, Yelp

 

(1) Network effects:

Direct Network effects: As more publishers join the platform, Facebook gets more user data and improves its targeting capabilities even further, thereby, benefiting existing publishers. However, more publishers also create competition for the advertiser鈥檚 ad budget, thereby, reducing聽publisher鈥檚 fill rates [6].

Indirect network effects:聽As the number of publishers on the platform increases, more advertisers wants to join so as to聽reach more users. As the number of advertisers increases, more publishers wants to join the platform as then they can have better fill rates and can get a better pricing for their inventory (known as CPM [7]).

Local network effects: Often times advertisers want to run a campaign in a specific geographic area. For e.g. Starbucks running a promotion in Seattle. In such cases, Facebook only needs to have a lot of users/ inventory in Seattle and not across United States and building this local network is not very difficult. Facebook is well positioned to benefit from this as its users are distributed all over the world.

Facebook has been using acquisitions to take advantage of local network effects in this industry. For e.g. Facebook acquired Instagram to get聽Instagram users, who belonged to a demographic group in which Facebook was originally weak, for its advertisers. Similarly, it tried to acquire Snapchat for $3Bn to get access to teenagers for its advertisers [8]. This could be seen as Facebook buying up “local networks” where traditionally it has been weak.

 

(2) Multihoming:

Facebook is well positioned to prevent multihoming on the advertiser side. First, it owns a lot of inventory (as it is the largest publisher on its own platform). Hence, advertisers cannot get access to captive Facebook inventory from any other source. Second, it has large amount of user data. Hence, its targeting capabilities are better than any other platform (only Google is in the same league).

There is some multihoming on the publisher’s side. First, publishers are wary of Facebook gaining too much control. Hence, they use sophisticated softwares that can route an ad request to multiple ad platforms (Facebook鈥檚, Google鈥檚 etc) and then show an ad from a platform that is willing to pay the most to the publisher. Second, large publishers are relevant聽enough to ink exclusive contracts with certain advertisers.

 

The future?

Facebook is well positioned to continue reaping billions from its strong ad platform. It has diversified its publisher base by opening its ad platform to 3rd party websites and mobile apps. Therefore, it is protected even if the engagement on its flagship properties like the Facebook app goes down.聽Anticipating that VR would be the next big computing platform, Facebook acquired Oculus so as to be in a position to dominate ads on VR too.

Endnotes:

摆1闭听丑迟迟辫蝉://蝉21.辩4肠诲苍.肠辞尘/399680738/蹿颈濒别蝉/诲辞肠冲辫谤别蝉别苍迟补迟颈辞苍蝉/贵叠-蚕4’16-贰补谤苍颈苍驳蝉-厂濒颈诲别蝉.辫诲蹿

[2] Every webpage or mobile app has certain screen areas designated for showing ads. These areas are called ad slots. For more information:聽http://www.iab.com/wp-content/uploads/2015/11/IAB_Display_Mobile_Creative_Guidelines_HTML5_2015.pdf

摆3闭听丑迟迟辫蝉://迟别肠丑肠谤耻苍肠丑.肠辞尘/2014/10/07/蹿补肠别产辞辞办-补耻诲颈别苍肠别-苍别迟飞辞谤办-补诲蝉/

摆4闭听丑迟迟辫蝉://飞飞飞.别尘补谤办别迟别谤.肠辞尘/础谤迟颈肠濒别/鲍厂-顿颈驳颈迟补濒-础诲-厂辫别苍诲颈苍驳-厂耻谤辫补蝉蝉-罢痴-迟丑颈蝉-驰别补谤/1014469

摆5闭听丑迟迟辫://飞飞飞.补诲飞别别办.肠辞尘/诲颈驳颈迟补濒/飞丑测-蹿补肠别产辞辞办蝉-补耻诲颈别苍肠别-苍别迟飞辞谤办-濒辞辞办蝉-产颈濒濒颈辞苍-诲辞濒濒补谤-补诲蝉-尘补肠丑颈苍别-168892/

[6] Fill rate = (ad impressions served)/(ad requests that were generated); Publishers naturally want to have a higher fill rate. For more information:聽https://www.quora.com/What-is-fill-rate-for-mobile-advertising-Why-isnt-it-100

[7] CPM = Cost per mille = cost for delivering 1000 impressions on a publisher’s website. For more information:聽https://en.wikipedia.org/wiki/Cost_per_impression

摆8闭听丑迟迟辫://尘补蝉丑补产濒别.肠辞尘/2014/01/06/蝉苍补辫肠丑补迟-蹿补肠别产辞辞办-补肠辩耻颈蝉颈迟颈辞苍-2/#肠冲惫别冲厂丑1蝉颈辩迟