• After Facebook’s Q2 Earnings Flop, Video is More Important Than Ever

    With last week’s Q2 earnings report, Facebook forecast that margins would slide for the next couple of years into the mid-30% range due to higher costs associated with beefed up security. Meanwhile, quarterly growth will decelerate from the high 40% range (or more) from recent quarters to around 30% for the rest of the year.

    Other companies would envy these targets, but given Facebook’s outsized historical growth and profitability, the stock has gotten hammered and dragged the whole tech sector down with it. One key takeaway for me from Facebook’s results and forecasts is that video is more important to the company than ever. Despite its potential, Facebook still doesn’t seem to have a video/monetization strategy. Among the big tech companies, only Apple’s video strategy seems less well-developed than Facebook’s.

    This is all the more surprising since CEO Mark Zuckerberg has been very public about his desire to prioritize video. Back on the Q2 ’16 earnings call, Zuckerberg said, “We see a world that is video first with video at the heart of all our apps and service.” Flash forward to Q2 ’18 and it’s clear that while the company has made some progress with video, it’s not yet close to having a material impact on the company’s financials.

    On last week’s earnings call, Zuckerberg highlighted IGTV by Instagram which only launched last quarter. IGTV has lots of potential to expand Instagram’s value proposition and possibly be a YouTube competitor, but in terms of being a revenue generator, it’s still early days.

    But as IGTV gains, the core News Feed is deemphasizing professional content, including video, per Facebook’s strategy shift earlier this year. With less professional video from partners, that has limited monetization potential anyway, there will be less video consumed. In truth, video monetization has always been an awkward fit for Facebook given its justifiable reluctance to pursue pre-rolls, the video ad industry’s workhorse unit, in the News Feed.

    This approach has driven Facebook to create the Watch tab and apps. Yet the content strategy for Watch has been all over the board, especially with respect to Facebook funding originals. While Watch has had some minor successes, and live streaming of news is enticing, the user experience is still suboptimal.

    I check the Watch tab at least once per week and am always surprised how off-base the “Top Videos for You” are. Then, under the News tab, the top featured news partner is Fox News, which is inconsistent with leftish-leaning content that dominates my News Feed. The whole experience still leaves much to be desired - it’s as if the algorithms driving News Feed and Watch aren’t at all connected.

    On the earnings call last week, COO Sheryl Sandberg highlighted a smattering of ways video is popping up on Facebook; more sharing with friends, more watching from creators on Instagram and more video calls on WhatsApp and Messenger. Sandberg also noted “marketers are making more video of their own,” mentioning an example of M&M’s UK’s successful five-second ad campaign and other ad tools for small businesses.

    All of these are no doubt important, but to really scale in video advertising (and hence make a dent in Facebook’s financials), the overarching imperative is to have more premium content that is highly viewed and can be strongly monetized. This is a lesson YouTube learned years ago and has doggedly pursued through investments in originals, its annual Brandcast upfront extravaganza, Google Preferred, YouTube TV, etc.  

    Facebook does not yet seem to understand this and as a result, while Zuckerberg may talk about the centrality of video to Facebook’s future, its impact on the company’s revenue seems to be off in the distance somewhere. At a time when Facebook needs to find material new revenue sources, video has lots of potential. It just needs to devise a viable strategy to pursue video and then stick to it.