How Facebook Prints Money

Performance marketing on social is foundational to Dysrupt. As such, it would be tone-deaf to not speak about the #StopHateForProfit campaign.

Currently, 313 companies are participating in the protest including some of the largest advertisers in the world: Unilever, Verizon, Walgreens, Patagonia, Diageo, etc. (Full list here). It is important to note that as we were finishing our write up Facebook posted an updated response addressing the nine recommendations outlined by the Stop Hate For Profit boycott organizers. It will be interesting to see how the boycotting advertisers respond to the Facebook updates.

If Facebook was a TV network, this type of boycott would work extremely well. Unfortunately for these brands Facebook is not a TV network. Facebook has entirely different economics than a TV network for multiple reasons, but the big two that matter in this discussion are that:

Because of these facts, this boycott by the top advertisers could mean Facebook makes more money - not less.

Huh?

With 8 million active advertisers and $17.74 Billion in revenue in Q1 2020, Facebook has a healthy business and a high level of demand. Furthermore, Facebook's business is driven almost entirely by a self-serve auction that allows the smallest business to compete and consistently win against the largest, most well funded creative agencies and corporations in the world.

This ability for a small business to compete with a large business is driven by an auction that actively subsidizes great ads and penalizes poor ones. This is a core component to Facebook's algorithm - if you make more relevant and engaging content then Facebook will let you win more impressions with lower bids -  or if you make bad content then Facebook will require a higher bid in order to win impressions. It's why we feature a Creative Review each week in our newsletter. For anyone wondering why they aren't hitting daily spend limits, look at your creative & site flow.

And yes while all advertisers are welcome and can compete in the auction, in reality the larger advertisers still have more resources at their disposal.  They have access to the best creative and strategic agencies in the world, platform teams dedicated to their business, and likely an internal team that knows every nuance and hack to extract the most value out of the auction.  And Facebook's auction allows them to pay less for each impression because of this extra work.

Now what happens when that subsidized top tier advertiser leaves the auction?

Stratechery explains one aspect in a recent article, "The news about large CPG companies boycotting Facebook is, from a financial perspective, simply not a big deal. Unilever’s $11.8 million in U.S. ad spend, to take one example, is replaced with the same automated efficiency that Facebook’s timeline ensures you never run out of content. Moreover, while Facebook loses some top-line revenue — in an auction-based system, less demand corresponds to lower prices — the companies that are the most likely to take advantage of those lower prices are those that would not exist without Facebook, like the direct-to-consumer companies trying to steal customers from massive conglomerates like Unilever."

This goes to our first point -- Facebook has relatively unlimited advertiser demand.

Unilever pulling ad spend has no impact on Facebook as the impression share would simply be gobbled up by the next advertiser in-line. There is no upfront or roadblock so Facebook isn't scrambling to fill the inventory space. Essentially all impressions are bid/won dynamically in fractions of a second, every second, of every day.

*And now the bold statement and irony that #StopHateForProfit could actually make Facebook more money.

As we noted above, the impressions won by a top tier advertiser like Unilever mean they are likely paying less than the second-place finisher. The logic goes as follows.

  1. Unilever drops out of the auction
  2. There are 8MM other advertisers available to potentially purchase ads in the auction that Unilever was previously beating with stronger creative/tactics and thus having to bid less
  3. What would have been the second-place finisher in the ad auction will now instead win that impression. They were second because their ads were of lower quality/relevance to the user.
  4. This new winner will thus pay slightly more for that impression than Unilever would have (all else being equal)

Facebook only loses revenue when people stop using the platform. Fewer impressions to sell means less revenue for Facebook. Though we doubt that's going to happen as Facebook saw a 10% increase in MAU due to COVID.  Our bet is that Facebook's next quarterly will once again show record revenue.

--
* Article originally written on July 7th for Issue 30 of Weekly Dysrupt

Thanks to Mirza Babic for sharing their work on Unsplash.

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