Social media king Facebook Inc (NASDAQ:FB) is on thin ice with advertisers after it was revealed the company overstated an important video viewing metric, and the fallout could soon hurt its bottom line and change the online ad landscape forever.
That’s because advertisers and media companies, who are now aware that video viewing times were artificially inflated by a whopping 60% to 80%, may choose to spend less on video ads. At the very least, a temporary pause in spending seems prudent, given how significantly the numbers were fudged.
Until recently, Facebook was only factoring video views of more than three seconds into its average viewing time. The company attempted to quietly update the metric recently, but advertisers pressed the company for more information. Within days, a scandal was born — the likes of which the mobile advertising world has never seen before.
Any downturn in the pace of video ad spending — and more importantly, mobile video ads — would have a big impact on Facebook’s earnings. Advertisers are projected to increase mobile video ad spending by 55% in 2016, according to estimates by industry researcher eMarketer, with overall mobile advertising growing 45% this year.
Measuring the impact of those billions and billions of online ad dollars is largely left to the platforms themselves. That’s a big problem for ad companies, who are at the mercy of Facebook and other sites to be honest about their ad metrics.
Now that the cat is out of the bag, advertisers might scale back online video ads in favor of more traditional channels. It could also lead to a big industry shake-up, says the WSJ:
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.
If the average duration of video viewed metric in question was only off by a few percentage points, it wouldn’t be such a big deal for advertisers. But the degree to which the numbers were inflated could force these companies to react — and that would be bad news for Facebook.
Facebook shares closed at $127.96 on Friday, down $2.12 (-1.63%). Year-to-date, FB has still gained 22.26%, making it one of the best performing large-cap stocks of 2016.