What is more valuable to advertisers, an hour of television or an hour of Facebook [FB]? Up until this year, the answer has been TV. But starting 2015, that will change. Facebook ads, with constantly improving targeting and tracking capabilities, will eclipse the value of TV ads on a user-hour basis and TV viewership will become less valuable.
Thanks to new apps and a generational shift in behavior, people are spending less time in front of the TV and more time on social apps like Facebook. According to Nielsen, TV viewership peaked in 2012 at 5 hours 37 minutes per person, and has dropped 7% at an annual rate to roughly 4 hours 50 minutes. In contrast, users are more addicted than ever to Facebook, spending an average of 39 minutes per day on the network, a 7% annual growth rate since 2011 (as shown below).
A number of forces are driving the shift from analog to digital media. Broadcast TV ratings have fallen precipitously, as viewers spend more time watching higher quality and more niche programming on cable than on CBS [CBS], NBC [CMCSA], ABC [DIS], or FOX [FOX]. Millennials often forgo cable altogether, preferring to watch streaming services like Netflix [NFLX], Amazon [AMZN] Prime, and YouTube [GOOG] instead of subscribing to Time Warner Cable [TWC], Verizon [VZ], or Comcast. The result is a shift of TV viewership from linear broadcast to online streaming, an idea that Netflix CEO Reed Hastings prophetically telegraphed long ago.
At the same time, smartphones and tablets have created a new platform for entertainment. Apps on mobile devices offer bite-sized pieces of content that can be consumed on the bus, at work, or while in line. Facebook is the most popular app on mobile devices. Its 115 million unique US users spend more time on Facebook than any other app. In fact, despite its declining popularity among teens, Facebook remains the most used social app in every age group. Moreover, thanks to its acquisition of Instagram, Facebook has recaptured much of its lost teen audience.
Advertisers have been monitoring these trends and spending accordingly. While still increasing, TV ad spending is beginning to taper. In the US, budgets are shifting to digital advertising at an accelerating rate. Digital advertising is expected to grow 15.6% this year, as shown below. Facebook’s North American ad revenue is projected to grow 29% from $5.3 billion to $6.8 billion. Even with this growth, Facebook would still represent only a small fraction of the digital ad spending pie.
If these trends continue, however, Facebook will surpass television in advertising value per user-hour in 2016. The combined impact of declining TV viewership, greater time spent on smartphones, and growing digital advertising spending have created a unique crossover point for Facebook, as shown below. According to ARK’s estimates, in 2012, a user-hour on Facebook was worth roughly five cents to advertisers, versus 12 cents for TV. That gap has been closing. This year, if average revenue per user grows to $32 and daily average usage reaches 40 minutes, Facebook will earn 13 cents per user-hour.
Content is moving inexorably online and disrupting traditional media. The print industry has survived this transition but is in tatters. Now television, shielded thus far, must come to terms with this digital reality. With digital advertising set to overtake TV in 2018 and a slew of video ad products coming from Facebook, Twitter, Instagram, and YouTube, traditional TV networks will have little choice but to aggressively bring their content online. They may not be nearly as profitable as they have been historically, but they will survive.