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When we described several moves Facebook recently made that place it in direct competition for TV ad dollars, we received a lot of criticism from our readers in the comments underneath the story.TV has its defenders, apparently, and they don’t ever see a time they’ll turn off the television in favour of streaming video via Facebook.
But it’s not just about Facebook’s business ambitions, or whether advertising on Facebook is more effective than TV.
It’s also about the economics.
If Facebook is to grow its revenue base, it must take ad dollars from old media — and that means television.
Here are six financial facts that all suggest Facebook will be forced to compete against TV in the future:
1. Facebook has a “big numbers” problem, which means it will be forced to steal adspend market share from TV.Facebook will book more than $4 billion in ad revenue this year. There is no point in Facebook going after marginal businesses anymore. Facebook must find markets worth billions to move the needle. And while it might shift some dollars from Google or Groupon, the secular economic trend is for digital ad media to steal share from old media. This eMarketer chart (right) predicts that TV will have difficulty increasing / maintaining its market share of ad dollars while digital media only grows.
2. Online video is one of the biggest growth areas in digital advertising, and Facebook cannot afford to sit on the sidelines.
A minute spent watching video online is a minute NOT spent watching it on TV. Dollars are shifting to online video, and ad rates for video are higher than those for the regular display ads you usually see on Facebook. Spending on video ads are predicted to reach about $13 billion this year; and $28 billion in 2017. Facebook will need to take its share of those dollars if it is to continue to grow.
3. TV dollars are already shifting online.
Digital media commands more than 36% of consumer media time but only 15% of overall advertiser spending, according to Barclays Capital analyst Anthony DiClemente. Adspend on digital is growing at double-digit rates, but not so for TV. In order to grow, Facebook must take dollars from old media — and most of those dollars are in TV. The shift is already happening, Wall Street analysts say.
4. Digital media is already the No.1 competitor to TV.The web already ate print and billboards. TV is next. (Click to enlarge chart for details.)
5. Facebook and Google have both created Nielsen-like audience “ratings” to make their numbers directly comparable with TV’s.
For years, TV commanded ad dollars because it was able to tell advertisers what audience ratings they got for their money. The web. meanwhile, talked about clicks. Clicks are aren’t the same as humans — especially when it comes to the way media gets bought. Advertisers want to buy gross ratings points (repeated eyeballs in bulk, basically), not clicks. Now Nielsen is doing for Facebook what it did for TV. Once advertisers can compare audiences plus ROI on Facebook, versus mere audiences on TV, TV will likely lose the comparison.
6. Some TV clients — like politicians — are already convinced Facebook offers them more than TV.
President Obama won re-election in part because his campaign team had better data than Mitt Romney’s. The Romney team, infamously, was working with its own misleading polls, and worst of all over-estimated the percentage of white people among voters and under-estimated the percentage of non-white minorities. TV doesn’t solve these elementary data errors. But Facebook — which tells candidates everything they need to know about its users — has one of those Big Data warehouses that can identify voters down to the individual, not just the local TV market. Notably, the Obama campaign was working on its Facebook army a year or more before the election. And this Michigan candidate believes she won because her GOP opponent spent on TV while she spent on Facebook.
Given the secular, macro shifts in ad dollars, it’s hard to imagine a scenario in which Facebook doesn’t steal at least a slice of the ad dollars that would have gone on TV.
Disclosure: The author owns Facebook stock.