Sept. 23, 2016 12:53 p.m. ET
The first is the contribution of video to Facebook’s future growth rate. The second is the belief that advertising is moving inexorably to the internet. The lack of solid data about online advertising has caused some companies to warm again to traditional TV, where data could be seen as more reliable.
Facebook’s metric for the average duration of video viewed was artificially inflated because the company only included video views of three seconds or longer in its calculations, leaving out short times that would weigh down the average. The company doesn’t break out the sources of its ad revenue by medium, but lucrative video ads have been a pillar of its strategy.
Indeed, U.S. video ad spending on mobile will grow 55% in 2016, according to estimates by eMarketer, outpacing the 45% growth expected for mobile-ad spending as a whole. Now that ad buyers can see that this video viewing metric was significantly inflated—by 60% to 80% for Publicis Groupe
subsidiary Publicis Media—they may choose not to spend as much on the platform.
The error could bolster the case for traditional TV advertising, where the value of ads is determined by third-party arbiter Nielsen. There has already been some recent backlash against internet advertising amid heightened concern over ad fraud, and the revelation of Facebook’s error may lead to more calls for more robust, independent measurement across apps and the mobile internet.
All of this matters to investors because so much of Facebook’s value rests on its ability to extend its advertising dominance. Its market valuation already incorporates highly optimistic assumptions about its ability to expand its global market share. At 37 times forward earnings estimates, any threat to that ability should pressure Facebook shares.
Granted, the metric in question is one of many that Facebook offers, and it may not have been the primary one advertisers used to make their decisions. Facebook is also one of the few options for achieving reach and scale on mobile, limiting the alternatives for marketers who want to reach consumers on their smartphones.
Still, the degree of the swing in the video viewing numbers is high enough that advertisers may be forced to react.
The social network’s financials have been nearly impeccable in recent quarters. A stumble like this could spur investors to become more skeptical.
Write to Miriam Gottfried at [email protected]