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Facebook's Expanding Search Advertising

Adam Levy, The Motley Fool

Watch out, Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Google and Amazon (NASDAQ: AMZN)Facebook (NASDAQ: FB) is coming for some of your most profitable advertisements. 

The social media company started testing ad placements in search results last December, and it's now expanding those tests to more marketers, according to a report from Marketing Land. Select retail, auto, and (now) e-commerce marketers can opt to show ads in Facebook search results, as well as Facebook Marketplace search results.

Search advertising is one of the few areas of Facebook's core app that remains under-monetized. Management started warning of ad load saturation in its News Feed three years ago, and that product remains its biggest source of revenue today. Its second-biggest revenue source, the Instagram feed, is also saturated with ads. Search ads could become a valuable source of ad inventory for Facebook as it looks to add more inventory beyond its core feed products.

The Facebook like symbol on the sign at the entrance to its headquarters.

Image source: Facebook.

Not your typical search ad

Facebook's 1.6 billion daily users conduct billions of searches every day. The company last updated investors on the metric in 2016, noting its users perform 2 billion searches per day. That number is only getting bigger as Facebook adds users and gives them more reasons to search, including products like Marketplace and the growing number of Pages and Groups on the platform.

But unlike Amazon or Google search advertisements, Facebook isn't giving advertisers the option to target specific search terms. Instead, the company is automatically placing ads in search results that it thinks will produce the best result for the advertisers (at least, for now).

The inability to target specific terms may make some marketers hesitate to use the new ad placement option. Years of advertising on Google and Amazon has given seasoned marketers a list of terms where they know their ads convert. And on the flip side, many marketers know specific terms where their ads won't convert. When Amazon introduced negative keyword targeting (ensuring ads won't show up for specific search terms), advertisers saw their return on ad spend skyrocket, according to data from Merkle.

Facebook's strategy is predicated on the idea of making advertising as simple as possible, which is what has enabled it to grow its active advertiser base past 7 million. But it's extremely limiting for more advanced marketers.

A low-cost alternative?

Since Facebook is limiting targeting on search ads, they might not fetch the same price per impression as tried-and-true News Feed ads. As the cost per impression for core News Feed ads continues to climb as growth in demand outstrips growth in supply, search ads could provide a low-cost alternative for advertisers looking to reach Facebook's massive audience.

Advertisers have been flocking to Facebook's Stories products for the same reason. "There's a real benefit right now to being an early adopter; the pricing is a very attractive," COO Sheryl Sandberg said about ads in Stories during the company's second-quarter earnings call.

Facebook has managed to find success in growing adoption of new ad formats first before allowing the market to optimize pricing over time. If Facebook can show good results through automatic search ad placement, it should be able to extract a lot of value from search ads, especially those closely associated with commerce. That's one reason why investors should be bullish on the company's recent move to open ad inventory in the Instagram Explore tab, which also features a search bar.

No threat to Amazon or Google -- yet

Searching on Facebook remains very different from a search on Google or Amazon. Google or Amazon searches are usually full of more intent to purchase than a search on Facebook. Someone might search Facebook to get product recommendations from their friends. If someone is searching Amazon for a product, they're probably looking to buy it.

And without keyword targeting, marketers are very unlikely to shift any of their ad budgets to Facebook from Amazon or Google.

But if Facebook continues to increase its presence in online commerce, search could become a bigger part of its business. The corresponding search ads could be extremely valuable to advertisers, especially if Facebook enables more targeting options like keywords. For now, however, the amount and value of searches on Facebook aren't a threat to take business away from either of its two biggest competitors. That doesn't mean it's not a significant path to growth for the social media company, though, as more advertising dollars flow online.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Alphabet (C shares), Amazon, and Facebook. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, and Facebook. The Motley Fool has a disclosure policy.