Advertisers Stream Into Facebook

Profit surges 76% despite questions on video-ad performance and graphic content

Author. Deepa Seetharaman Source: Morningstar

Facebook Inc. continues to sweep digital advertising, alongside rival Google, despite unrest among marketers about how their advertising is handled.

Facebook on Wednesday said first-quarter profit surged 76% to $3.06 billion, allaying concerns that questions over video-ad performance and the spread of violent and graphic content would mar growth. The social network's soaring results echoed strength at Google parent Alphabet Inc., which last week reported 29% growth in net profit despite a backlash that began late in the quarter from companies upset about their brands being advertised against objectionable videos on its YouTube video platform.

Facebook and its photo-sharing app, Instagram, are the "two most important mobile-ad platforms," Chief Financial Officer David Wehner said in an interview.

Facebook and Google dominate the online advertising market. The two tech giants snatched 99% of the online-ad industry's revenue growth last year, estimated Pivotal Research analyst Brian Wieser using data published by the Interactive Advertising Bureau. Facebook holds 16% of the global digital-ad market, behind Google's 33% share, says forecasting firm eMarketer.

Marketing executives "acknowledge they're concerned about fake news and the problems Facebook has had with live video," said eMarketer principal analyst Debra Aho Williamson. "They're concerned that at some point this will affect users -- but they haven't seen that yet. So that's why spending keeps going up."

Facebook's growing market share in digital advertising has helped drive its stock up 29% over the past year. Other metrics were also strong: the number of users who check into Facebook at least once a month rose to 1.94 billion, for example. However, its share price slipped in after-hours trading on concerns about whether new ad formats will be able to replace the booming growth it has experienced with its news feed ads.

The 49% jump in quarterly revenue to $8.03 billion was a sign of how marketers are increasingly embracing Facebook and Instagram. Marketing-technology company Kenshoo, which manages about $6 billion in marketing spending a year, said its clients were spending 41% more on social-media ads, largely Facebook.

Years ago, Chief Executive Mark Zuckerberg put mobile at the heart of the company, a focus that has fueled Facebook's growth for years. Facebook's ad prices jumped 14% during the first quarter, while the number of ad impressions increased by about a third, as users spent more time on their mobile apps. "Mobile continues to be the driver of our business," Mr. Wehner said.

Now Mr. Zuckerberg is weaving more video throughout Facebook's products, adding more opportunities for Facebook to show more-expensive video ads -- but also creating new uncertainties.

Video and Instagram could pick up the slack from an anticipated slowdown in advertising in the news feed. On Wednesday, Mr. Wehner reiterated his warning from last year that Facebook's ad revenue growth will "come down meaningfully over the course of 2017." Facebook also expects the ad load -- the number of ads it can jam into its main news feed -- will play a smaller role in driving revenue growth after mid-2017.

Facebook is fielding pitches for TV-like original programming, in the hopes that weekly shows on Facebook will change the way people currently use the platform and eventually draw marketing dollars that have traditionally gone to television.

Facebook is now testing a way to profit from those longer videos through "ad breaks" -- ads that appear in the middle of a video -- in both live broadcasts and on-demand videos. It also tweaked a setting so sound is on by default in some videos, a move designed to appease advertisers.

If successful, these "ad breaks" will help Facebook convince publishers to create longer videos without the platform paying them outright, executives said. Advertisers are concerned that users will drop off a video once they see an ad in the middle of a video. In addition, Facebook users aren't accustomed to watching longer videos on the site.

But advertisers aren't entirely sold on Facebook's nascent video-ad products. Facebook's video product remains "uncertain ground," according to a new report by GroupM, the ad-buying unit of WPP PLC. For every 20 video ads served in the news feed, just one was watched for 10 seconds or longer and three watched for at least three seconds, the report said.

Some of that skepticism lingers from concerns over how Facebook measures video-ad performance, sparked by the company's disclosure last fall that it had vastly overestimated average viewing time for video ads on its platform for two years.

In addition, concerns about Facebook's handling of violent, graphic content, especially on its live-video product, could give advertisers pause, some analysts said. Facebook Live, the venue for some of the new video advertising, has been the subject of recent controversy after users broadcast violent videos such as a Cleveland man fatally shooting another man.

Earlier Wednesday, Chief Executive Mark Zuckerberg pledged to hire 3,000 more content reviewers over the next year so inappropriate material is removed from the site more quickly. Last month, Facebook promised to conduct a review of its reporting process.

But demand for Facebook ads isn't expected to decline anytime soon. According to a RBC Capital Markets survey, 65% of advertisers buying Facebook ads plan to spend even more. Nearly 40% told RBC that they spend more than a fifth of their online budgets on the social network, up from 31% in February 2016, according to the survey published in late March.