Why Facebook's Unloved Right-Rail Ads Aren't Going Away Anytime Soon

Facebook's announcement last month that it would cull its ad units by half begs the question of what else is on the chopping block. Little-used search ads have already bit the dust, but what about the right-rail ad, maligned for low click-through rates but still in heavy circulation?

Until early 2012, right-rail ads -- once home of weight loss schemes and teeth whiteners -- accounted for nearly all of the company's ad revenue. Since then they've been virtually swept under the rug as marketers embraced news-feed ads, prime real estate that unlike the right-rail ads also flow onto mobile devices.

"The stream on both Facebook and Twitter is where the really meaningful dollars are being spent by brands, since it allows them to be in the social conversation," said SocialCode's CEO Laura O'Shaughnessy. The right-rail is now largely the domain of direct response advertisers and heavy retargeters which buy them on the cheap out of Facebook's exchange.

The little right-rail boxes, mostly unnoticed by Facebook users and not at all social by anyone's standard, still account for a big percentage of Facebook's ad revenue -- 53% versus 47% pitched in by news-feed ads on both desktop and mobile, according to J.P. Morgan analyst Douglas Anmuth.

While their share is slipping as appetite for news-feed ads grows; they'll still account for 43% of Facebook's revenue in the fourth quarter, according to the projection. While most expect Facebook to do away with them someday, it's not happening soon.

In an interview with Ad Age last month, VP-global marketing solutions Carolyn Everson said that they still serve a purpose in allowing small- and medium-sized advertisers to afford to advertise on Facebook. The company touted last week that it had a million advertisers on the platform, which wouldn't have happened without them.

"The right-hand side...is still serving a significant purpose," she said. "I'll start with small and medium businesses, which actually rely on that advertising unit a lot, all the way up to big brands that use it particularly for Facebook exchange and retargeting."

However, Facebook ad partner companies are seeing a dramatic shift in their business that strongly suggests that right-rail ads are falling out of favor with marketers -- despite the fact that they're sold at a much lower CPM, or cost per thousand impressions. (The consistent case for news feed ads is that the click-through rates are substantially higher, which makes the cost per conversion, like a click, effectively much lower.)

SocialCode's O'Shaughnessy said that 80% of Facebook spend currently being managed by her company is being applied to the news feed.

But the sheer volume of impressions Facebook can offer on the right rail is bound to make it a hard habit to break, even as it's pitching in an increasingly small share of ad revenue. Ms. O'Shaughnessy estimated there are 10-times as many ad impressions surfaced on the right rail as there are in news feed, which will continue to host a constrained number of ads so as not to disrupt users.

"Before the right-hand rail would go away, Facebook would want to have something that would provide additional inventory possibilities," said Rob Leathern, CEO of the social-ads company Optimal, which now has more than 50% of Facebook spend under its management dedicated to the news feed, up from 30% earlier in the year. He pointed to the much-speculated-of Facebook ad network as a means to open up new ad real estate.

While Mr. Leathern thinks the cull of right-rail ads is a possibility, he sees it happening a year from now, at soonest.

There's also a case to be made that right-rail ads are irreplaceable for the small and medium-sized businesses that Facebook has been clear about courting, in terms of both cost and ease of use, as well as in emerging markets where the company is trying to get a foothold in the local ad market.

"Facebook, like most media companies, needs to have ad products that meet the needs of many types of advertisers, large and small, and not every advertiser can afford to be in the news feed," said eMarketer's VP-communications Clark Fredricksen.