While nobody could deny that Facebook Inc (NASDAQ:FB) has been a smashing success, those FB stock holders who keep close tabs on the company’s operations know all too well there will come a time when the company can’t add new users at a breakneck clip, and can’t cram any more advertisements onto each member’s page.
What if, however, Facebook could come up with a way of selling ads outside of its flagship social networking site?
Actually, it has been doing that for a while, though has struggled to make a dent in the North American display ad market, which is mostly owned by Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG), via Google. With a little help from Amazon.com, Inc. (NASDAQ:AMZN) and others though, Facebook is now positioned to take a bigger bite out of that pie.
Facebook Rolls Out Header Bidding
It’s not a description that does the idea justice, but it does set the stage — header bidding is a way a website operator, or “publisher,” can pick the display ad that pays the most for appearing on a particular web page.
In the web’s early days, it wasn’t always clear to an advertiser if the ad space they were buying was worth it.
Likewise, it wasn’t clear to a publisher if the ad space they were selling was the best price they could achieve. But, in that the communication of such information was poor, both parties relied on the middleman (usually Google) to do the best it could do, and keep a few pennies per impression for itself.
A lot has changed since the dawn of display ads, though. Namely, not unlike a stock exchange, a buyer and seller of web ads can now see the market’s best bid and offer.
It’s not exactly a new idea. Facebook announced it was developing this so-called Facebook Audience in August of last year. That was a soft launch though, and didn’t include all of its possible partners that will provide the underlying technology. It wasn’t until this week the product officially launched, with Amazon.com’s header-bidding platform being one of six ad networks participating, all competing for business.
While FB stock owners have good reason to be excited, Google is still Google, and is a force to be reckoned with. It won’t go down easy.
And yet, thus far it has not developed a weapon that it can effectively fend off the growing tide of header bidding. Its best response has been what it calls Dynamic Allocation … a sort of hybrid of header bidding and its traditional ad-sales approach. Advertisers aren’t impressed, however, saying it only benefits Alphabet.
Sortable’s Chris Reid opined last year that the advent of header bidding could drive Google’s display ad market share from 90% to something between 40% and 50%. Conversely, publishers participating in the early dry runs of its Audience Network program saw revenue grow between 10% and 30%.
With those metrics on the table, something explained last year in the wake of the soft launch of Facebook’s header bidding plans was very much on target:
“Google is frankly very defensive because their position is being threatened. If you now amplify that by Facebook saying, ‘Hey, wait a second, look, there’s a chink in the armor. All these independent companies have found it, why don’t we do the same thing and bring our wallet to bear?’ We’re actually going to start to see an event that could at a very, very substantial level check the Google monopoly.”
Further threatening Google is the fact that Amazon and Facebook may be better equipped to build a profile of a particular user than Google is, delivering more targeted ads from one device to the next. In other words, based on a user’s PC history, the network can deliver a specific ad to that user on his or her mobile device.
Google’s user profiles allow for highly targeted ads as well, though that aging approach may not be as refined and updated as the one offered by Audience Network.
Bottom Line for FB Stock
The ultimate impact the new version of Audience Network may have on the profitability of FB stock isn’t perfectly clear. There is clearly an upside though, with little to no downside.
To the extent guesses are being made though, observers are apt to be underestimating the benefit the new scheme will have. Google’s size and disinterest in being competitive have given rise to the new competition Facebook is now supporting. Advertisers are already trying that “something else” besides Google, and liking the switch.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.