The value of Facebook shares can be seen as a good proxy for the state of online advertising in general. Whereas companies such as Google have varied income streams, Facebook ostensibly makes all of its money from advertising. 97.9% of Facebook’s global revenue in 2020 to be exact. As such, Meta’s share price and the online advertising market are intrinsically linked.

Many of us are wondering if Facebook’s recent misfortunes tell us something more serious about the state of online advertising, especially in the midst of international turmoil and a spiralling cost of living crisis.

Bleak quarterly reporting

February’s share price plunge came as a result of the release of Meta’s Q4 2021 financial reporting. Earnings per share were down to $3.67 for the quarter, from $3.88 the year before, despite quarterly revenue improving to $33.7bn.

Aside from earnings, the major concern was Facebook’s daily active users, which fell for the first time in its 18 year history. This led many to wonder if we had finally reached the peak, and ultimate decline of Facebook’s dominance as a social media platform. Competitors such as TikTok and Snap have done far better at cornering the market across the younger demographics, and allegations of corporate wrongdoing from whistleblower Frances Haugen have tarnished Facebook’s reputation globally.

Facebook’s Q1 2022 earnings per share slid further to $2.72. This time due to external factors, including the post-christmas slump, the war in Ukraine, oil and gas prices, and high inflation. Whilst the heat is off Facebook itself, thanks to the resurgence in its daily active users, there are several worrying macroeconomic trends in 2022 which may impact the whole advertising industry.

Apple’s privacy push

The road forward for Facebook is one with many challenges and opportunities. Year on year, ad impressions across their family of apps increased by 15%, but the average price per ad impression fell by 8%. CEO Mark Zuckerberg pointed to Apple’s privacy update generating a “meaningful headwind” for its targeted ads.

On a positive note, Facebook have shown they can still reach a wide user base with their advertising product – however, the lack of concrete targeting in a post iOS-14 world has made it harder than ever for advertisers to get their offering in front of the right people. Resultantly, users are engaging with on-platform advertising less and less, and Facebook has suffered monetarily.

Facebook keep it fresh with Reels

Another notable challenge is the emergence of TikTok, and the adoption of the short video format by competitors such as YouTube. Facebook have responded in kind with Reels, which are fast becoming the dominant medium on their apps. Reels now account for more than 20% of time spent on Instagram, with this figure growing month on month. Long and short-form videos account for 50% of the time that people spend on Facebook too.

Google knows all too well that video content is far harder to monetize. One only has to look at the consistently low CPMs for advertisers on YouTube to realise this. Facebook is aware, but will need to rely on video content to drive engagement, and keep TikTok from stealing even more market share. The challenge for Facebook will be to incorporate less intrusive ads into Reels without impacting user experience. If they succeed, advertisers will certainly benefit.

Navigating the cost of living crisis

Upward inflationary pressure will be the UK’s number one problem in 2022. The Bank of England have already confirmed they are duty bound to trigger a recession to curb inflation.

In real terms, this means people will have less disposable income to spend, and advertisers are bound to suffer.

Search advertising should be fairly well insulated – where there is a search, there is intent. Sadly, the same isn’t true for social media advertising. Anecdotal evidence suggests that advertisers are cutting budgets on platforms like Facebook, and focussing on bottom of the funnel activity such as remarketing. Facebook, and other social media platforms, will have to weather the storm, and will likely take a large hit to revenue in the coming months.

The outlook for 2022

The prospects for Facebook’s year ahead look mixed. On one hand, they have proved that the fall in user base may have been a temporary blip. Time on platform is also up thanks to the addictive nature of Reels. If they can work out a way to effectively monetize their new offering, they will be able to capitalise.

On the other hand, there are far too many market factors at play to make the road to redemption an easy one for Facebook. We don’t yet know how much the economy will slow in late 2022, but it’s clear that consumers’ purchasing ability will be diminished. Advertisers that stay on Facebook through this difficult time will need to make sure they are as efficient as possible.

Whilst the outlook for Facebook doesn’t look wholly positive, they have proven themselves to be a titan of the online advertising space, and we’re confident they will bounce back.

What should advertisers do?

Priority number one will be to set up the Facebook Conversions API, in order to bridge the gap in tracking caused by the Apple privacy features.

In the medium term, brands will need to focus on short-form video content, which looks like it could be the cornerstone of social media advertising moving forward. As for the inevitable slowdown in sales, it will be up to companies to decide if they need to cut advertising budgets, or keep themselves front and centre of the conversation by spending through the downturn.

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