Facebook at 10: The End of the Beginning (Or the Beginning of the End)

Ad Business Is Booming, but Social Network Needs to Keep Distracted Users Engaged

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Credit: Illustration by Taylor Callery

If you're reading this publication, life without Facebook is probably unimaginable to you. Maybe the social network doesn't delight you the way it once did, and maybe it even annoys you. But your Facebook account has become a fixed utility in your life, a fundamental way of belonging to the world, like having a landline used to be.

Facebook is blooming at 10 years of age, flush with users and revenue. Its global user base has swelled to 1.23 billion people, 62% of whom log in daily, and it's still growing. The hand-wringing of two years ago by marketers over whether its ads are effective seems like ancient history.

Marketers have answered that question with their wallets: Facebook ads do work, especially when they're slotted in users' news feeds, on desktop and mobile devices alike. In the last quarter of 2013, the company's ad revenue increased 76%.

Ultimately, though, the big unknown that could imperil Facebook's future is how well it will age. Will people continue experiencing the compulsion of wanting to check it several times in their day?

Facebook is no MySpace. There's no implosion coming; it has its hooks into us too deeply. It's home to years of photos that the less prescient among us didn't think to back up elsewhere and a network of connections that can't be furnished by any competitor.

More windows
But what happens when it ceases to be a bright, shiny object and becomes something more banal—a tool to stay on the grid and to sign into other internet services that you check periodically, but not everyone's favorite window into the lives of people who are dear to them. We're perhaps approaching that stage in the U.S.

There are a growing number of windows we can open on our mobile screens. One is Instagram, which Facebook had the foresight to buy, and another is Snapchat, beloved by teenagers, which it lacked the wherewithal to acquire. And there are plenty of other messaging apps that are hoarding eyeballs; undoubtedly another social phenomenon of Snapchat's magnitude will emerge too.

The proliferation of other options is having an effect on Facebook. By the company's own admission in October, daily usage among younger teenagers had declined. And there are various third-party reports aiming to quantify the extent of that decline.

A digital agency called iStrategyLabs reported last month that Facebook's self-serve ad tool showed that the number of U.S. teens between 13 and 17 shown as available to be recipients of targeted ads had declined 25.3% from three years earlier in 2011, and the number of 18- to 24-year-olds available had dropped 7.5%. And a research group called GlobalWebIndex reported that 56% of U.S. teens were active Facebook users in the fourth quarter of 2013, down from 79% a year earlier.

Neither contends that teenagers are leaving Facebook entirely. And Facebook still has more teens in absolute numbers than any other social platform. VP-Business and Marketing Partnerships David Fischer said Facebook has seen that as younger teens become older teenagers and 20-somethings, their usage increases.

In his view, Facebook is well equipped to deal with competition. "Obviously there's an insane amount of sharing right now," he said. "There are new apps and there are useful apps, and there are different ways that people are sharing content. And we think generally that that's good. We are the leader in a growing space."

When considering Facebook's long-term prospects, the question used to be: Can it be as profitable as it is popular? Now it's more like: Can it still be profitable if once-monogamous users are spending more and more of their time with new partners?

The bull case: ads win
There's a strong case to make that Facebook has an unparalleled amount of reach and that decreases in time spent by millennials are simply not material to marketers—at least not now and for the foreseeable future. After all, no one has asserted that younger people are deserting the network altogether, just that their attention is spread thin and they're using it less obsessively than in the past.

They're not faithful to Facebook but they can still be reached there.

Meanwhile, Facebook has made great strides with its ad products, introducing advances like lookalike targeting and better measurement. Its average effective price per ad grew 92% last quarter—a result of the adoption of more expensive newsfeed ads, but also an indication that Facebook ads are becoming more valuable.

"Their innovation around advertising and product is outpacing any decline in users and time spent," said Christian Juhl, North America CEO of digital agency Essence. "As long as that continues, up to some obvious point, they're going to continue to be one of the most important partners for advertisers."

Another good piece of news for Facebook's business—and a reversal from two years ago—is that marketers aren't thinking of it anymore as a medium for organic activations to take viral flight. (Facebook has already acknowledged that brand posts are seeing diminishing organic reach.) But marketers know that a well-targeted ad buy will get them in front of the right people.

For instance, the managing director of Digitas' San Francisco office, Dave Marsey, observed that Facebook used to be the place to start a social campaign aimed at millennials, but now that's Snapchat, Instagram or Twitter, where younger people are more active. Facebook's role is as the paid-media vehicle to extend the campaign's reach.

Effectively, that means Facebook waning coolness is a good thing—at least from a revenue perspective. Marketers come to Facebook prepared to spend money.

"We won't work with a client on Facebook if they're not investing in Facebook media," said Leslie Hall, president of the digital agency Iced Media. "It's nearly impossible to effectively scale on Facebook without an ad spend."

The bear case: slouching toward Yahoo
Facebook's darkest long-term prospect is not to implode like MySpace but to fade like Yahoo. It could happen if the network becomes less relevant over time, which it's doing all in its power to avoid by hedging its bets.

Facebook is investing deeply in Instagram and being deliberate about the rollout of a premium ad business. And in an effort to keep users addicted, it's mixing up the ingredients in its newsfeed, infusing it with more news content and making a bigger effort to get celebrities and public figures posting on Facebook.

It's also launching standalone apps like Paper, the Flipboard-like news-reader.

David Fischer
David Fischer

"We do that with the view that one decade was good, but we have many decades to come, and so we want to make sure that we're not wedded to what we've done before, and we're open to figuring out what's going to create the best experience for people," Facebook's Mr. Fischer said.

What's always been critical for Facebook is striking a balance between pleasing users and marketers, while it vocally favors the former. More recently, the tables have turned, at least with respect to the innovations that have actually stuck. Marketers have been pleased with the improvements Facebook has made to its ad products, while some of the bolder experiments Facebook has made with the user-facing product have fallen flat.

Graph search failed to get much traction, for example. And Facebook Home — the Android app that effectively lets Facebook take over a phone, which the company bought its first-ever TV ads to promote — was a dud.

It's possible that more users will start to have a wandering eye and spend more of their time on other services if Facebook fails to introduce innovations that resonate with them.

Digitas' Mr. Marsey said he thinks Facebook has been too focused on replicating experiences from other social networks, such as Facebook Places to counter Foursquare; Poke to mirror Snapchat; and hashtags to emulate Twitter.

"I want them to innovate to give millennials a chance to use the service in a different way than I do," he said.

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