Commentary

Facebook's Ad-Server Exit Ominous Signal For Publishers

by Romain Job , Op-Ed Contributor, February 25, 2016

Facebook’s recent decision to exit the ad-server market may seem like little more than a simple business decision. There is no doubt that the ad-serving business is far too small for Facebook. In the long run, though, its decision will jeopardize ad revenue for publishers of all sizes.

Facebook announced in early January that it was shutting down the ad-server portion of LiveRail, citing little usage of that part of the LiveRail business. Facebook will continue to focus on LiveRail’s automated sales of publishers’ in-app mobile video sales and native display ads.

Video advertising is both a great opportunity and a major issue for most digital publishers. Limited video-content inventory, high video-content production costs, low return on investment and sub-par sales skills and knowledge represent ongoing challenges for publishers, according to a May 2015 survey by Forrester Consulting. The scarcity of reliable and mature ad technology don’t help.

By killing LiveRail’s ad server, Facebook prevents others from moving in to benefit from video’s premium CPMs outside of the Facebook controlled ecosystem, and thus more or less forces publishers to move even more content to Facebook, because Facebook is the only company that earns revenue from these video ad units.

Facebook’s decision to shutter LiveRail comes when video digital ad spending is beginning to overtake other forms of ad spending. According to eMarketer estimates, U.S. digital video ad spending reached nearly $7.8 billion in 2015, an increase of 33.8% over the previous year. The 2015 estimate represented 13.3% of total digital ad dollars.

Terry Kawaja, founder and CEO of strategic advisory firm LUMA Partners, often argues that, contrary to mobile and Web advertising — which are demand-driven markets — when it comes to video advertising, it’s better to be on the supply side, because video inventory is scarce. 2015 brought one answer to this scarcity as “outstream” ad inventory exploded. Publishers that lack video content leveraged their display inventory for video ad campaigns in order to tap higher CPMs.

According to Forrester, more than three-quarters (77%) of advertising agencies and 70% of advertisers believe that outstream ads are becoming more important to their clients. Sixty-nine percent of media and publishing professionals said that outstream video would be more important to their clients in the future.

In our experience, LiveRail’s technology provided the backbone of many outstream ad-unit providers. Many of the third parties trying to grab the outstream opportunity had based their strategy on LiveRail’s ad server. By killing LiveRail’s ad server, Facebook, wittingly or not, undermined a number of outstream companies. That has the effect of drying up the outstream revenue of many publishers who never worked with Facebook or LiveRail directly.

Indeed, the outstream opportunity may be the key to Facebook’s revenue strategy. Although the company divulges little information about specific parts of its business, Facebook’s ad revenues undoubtedly ramped up when it added in-feed video. Facebook could be deriving as much as half of its revenue via outstreaming. In order to ensure even more premium inventory from these units, Facebook needs additional premium content.

A few months ago the company launched its Instant Article program, offering a huge incentive to publishers to host their content directly on Facebook. Facebook lacks owned and operated content, so in order to earn more premium inventory from these units, it needs an increasing amount of premium content from third-party publishers.

User-generated content is always a doubtful proposition for marketers. If you have good display inventory, though, you can more easily build good video inventory for outstream. If you have the GRP data on top, the opportunity is even clearer. Facebook seems to have based its revenue strategy on that concept: premium third-party content monetized through video ads whose CPMs stay high thanks to Facebook’s proprietary data.

As Facebook pushes publishers to put an increasing amount of content into the Instant Articles engine, Facebook controls more and more of the content, as well as the revenue and data. While Google has taken over control of publishers’ ads, Facebook is going a step further by seeking to control the content itself. Publishers need to be wary.

While smaller publishers may have little choice than to bow to Facebook’s wishes, large publishers can stand on their own. Those publishers who are able should resist the slide toward Facebook control, or they may find themselves losing more than just control.

ad serving, programmatic, video

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