Facebook's advertising business has already changed a lot in the past four years, growing to become four-fifths mobile. But now the underlying economics of Facebook's advertising business are changing, growing its ad business at its steepest rate in more than a year.
For each subsequent quarter since the fourth quarter of 2014, the growth in Facebook's average price per ad has decelerated while the decline in the number of ads served has started to turn the other way. In the fourth quarter of 2015, the average price of Facebook's ads increased by 21% year-over-year, and the number of ad impressions Facebook served increased by 29% year-over-year. That marks the first time since the third quarter of 2013 that Facebook's ad volume increased year-over-year as well as the first time since then that Facebook's ad volume grew at a higher rate than its ad prices.
During the company's earnings call on Wednesday afternoon, Facebook Chief Financial Officer David Wehner attributed the pricing and volume increases to Facebook showing more ads on mobile where they appear in the pricier news feed as opposed to desktop where they can also appear in the cheaper right rail. He did not explain why Facebook's ad volume growth exceeded its pricing growth.
The fact that Facebook's ad volume is growing more than its average ad price doesn't appear to be a bad sign. It seems to be a great sign for Facebook's business. The company generated $5.64 billion in ad revenue in the fourth quarter, up 57% year-over-year. And the company's overall revenue grew 52% year-over-year to hit $5.84 billion, beating analysts' estimates.
Facebook's mobile ad business in particular is booming. It grew 82% year-over-year to account for 80% of its total ad revenue and offset its softened desktop ad business.
Facebook continues to attract more and more people to visit its properties, especially on mobile which has quickly become the core of Facebook's business.
And as it's getting more people to regularly check Facebook, it's getting more money for each person that checks Facebook.
By all appearances, Facebook's business is doing more than fine. EMarketer expects Facebook to receive 31% of U.S. advertisers display ad dollars this year, growing its lead over runner-up Google, which is projected to get 14% of that pie. So Facebook's business is on a path to keep growing, but the path is different from the one it had been on. If anything, the price-volume trend points to its growth getting steeper again.
For the past couple years Facebook has wrestled with its audience migrating to mobile, which meant it could sell more of its pricier news feed ads but had to make sure not to overload people's feeds with too many ads. That latter consideration would constrain Facebook's ability to catalyze ad revenue growth by simply showing more ads to each user. But the increase in Facebook's ad volume in the fourth quarter suggests that Facebook doesn't have to contend with that limit anymore. And now it has Instagram and its off-Facebook ad business to further catalyze revenue growth.
Earlier this week, Brand Networks, an ad-tech firm that offers ways for brands to programmatically buy Instagram ads, reported that the number of ad impressions it bought on Instagram increased by roughly 1,240% from August 2015 to December 2015. Meanwhile, the price of those ads stayed relatively flat.
Facebook has also been aggressively growing its off-Facebook ad business. After flirting with running mobile ads outside of Facebook in 2012, the company formally rolled out its mobile ad network in 2014, which takes the ads that brands buy from Facebook and syndicates them across a network of third-party apps. Later that year it bought video ad-tech firm LiveRail. The mobile ad network and LiveRail business have combined to give Facebook a foothold in third-party publishers' ad sales for their apps and sites, a revenue stream that Google, Twitter and Yahoo also have. Facebook advanced its reach earlier this week when it expanded its mobile ad network to include mobile sites.
But neither Instagram's nor the off-Facebook ad businesses appear to be that big -- yet. Mr. Wehner attributed Facebook's fourth-quarter ad revenue growth primarily to Facebook and "to a lesser extent" to Instagram and its mobile ad network. "Core Facebook is really driving the top line," he said.
Similar to how Facebook is growing its audience and able to make increasingly more money for each individual in that audience, Facebook continues to get advertisers to pay more money on average for each ad it serves, but now it's able to serve increasingly more of them.
