Lawsuit resolution to affect Facebook long term ad revenue
Facebook has been on a good run recently. Not only has its stock risen back from the depths of the mid 20s to the low 30s range, it has also beefed up its technology base by acquiring several companies. The company is apparently aware of the challenges that it faces, both in terms of user growth and sustainable long-term revenues that it has been moving quite quickly, decisively and strategically. Sadly, regardless of its recent good moves, Facebook might have hit a snag with a lawsuit that was concluded recently that allows Facebook’s users to opt out of its sponsored stories advertising program.
As we have mentioned earlier, the sponsored stories advertising feature on Facebook was designed to plug a major revenue hole for the social networking company. Facebook does not have ads on its mobile presence previously. The reason is there is not just enough space that the layout does not allow for it. This raised a major red flag for the company because most of its growth in terms of user access is from mobile devices.
Alarmingly, there is a rising percentage of Facebook users who only access Facebook through a mobile device. No wonder then that Zuckerberg and company quickly snapped into action and formulated the sponsored stories advertising system. Similar to sponsored tweets on Twitter, people would see sponsored stories on their timeline and when they click, Facebook makes some money from the advertiser. It sounds good, right?
Well, it ran head-on to privacy concerns, and a class-action lawsuit was quickly filed on behalf of a potential 100 million Facebook users. As a result of the litigation, the social networking site was ordered by the court to enable users to opt out of the sponsored stories program. Facebook has agreed to let users do this for at least two years. The bottom line is that by doing this, Facebook is shut out of a highly lucrative source of revenue and more importantly its only way of effectively monetizing mobile device traffic. According to court documents filed during the class action litigation, the sponsored story ads caused at least 100% more and up to three times greater than standard Facebook ads. This boils down to a serious hit on the pocketbook of Facebook. The immediate damage of the court order opt out feature is $103.2 million to Facebook. Considering the growth rate of its mobile device member base, this number could easily balloon. So at least for two years, Facebook has to go back to the drawing board and try to figure out ways how to streamline its advertising presence on its mobile version while not tripping on privacy issues.