Facebook had earlier announced that the small size ads on the right hand side (RHS)will be replaced with fewer but larger ads, and Facebook plans to roll out the new ad format this week (in time for 3Q). Data from early tests suggest a significantly higher click-through-rate from users shown with the new design vs. the old (which makes sense as ads are higher quality and less cluttered), suggesting that the new ad format provides a more engaging user experience as well as potentially higher value to advertisers. It has been our view that Facebook’s early RHS ad format was low quality, and Facebook’s continued improvements to ad formats, targeting, and user experiences is consistent with our thesis that Facebook still has significant room to increase monetization.
Currently, RHS ad format consists of 5-8 small size ads that generate roughly a $0.30 cost per 1,000 impressions (CPM). The new ad format (if properly targeted) could generate $2+ CPM (given current PC news feed ads command $4.00+ CPM) given better branding value and higher click through rates. Assuming two larger ads per page, back of the envelope calculations suggest a potential for a 100%+ increase in revenue on the RHS (over time). One can expect a gradual ramp up of pricing for the new ads as advertisers adjust their bidding in the auctions.