Investing in Facebook: A comprehensive primer and analysis

Part 5

Why is mobile advertising a key revenue driver for Facebook?

Facebook’s mobile ads

In 3Q 2013, Facebook said that 49% of its $1.8 billion in advertising revenue comes from mobile use. Since its IPO in May 2012, the company has been increasingly aggressive about attracting mobile users and finding ways for advertisers to reach them. The company currently has 874 million mobile MAUs (monthly active users) and 507 million mobile DAUs. Based on eMarketer’s latest forecast of U.S. ad spending, the rapid growth of mobile ad revenues at Facebook has helped make the social network the second-largest digital ad seller in the U.S., behind only Google. In 2013, Facebook will take in 7.4% of net U.S. digital ad dollars, or $3.17 billion, while Google will account for nearly four in ten, or $17 billion.

emarketerEnlarge Graph

Facebook started running its first mobile ads in 1Q 2012, but it was only in June that advertisers on Facebook were able to purchase ads specifically on mobile. With no ad column available on Facebook’s mobile site or applications, mobile ads appear in News Feed. These can appear as Sponsored Stories or Page Post Ads. Facebook also implemented new targeting options for advertisers looking to market mobile apps, products, or services. These targeting options allow advertisers to reach specific audiences, using the details of which mobile device they use to access Facebook.

Facebook said on its earnings call that News Feed ads are performing very well. In analysis by Datalogix of 55 ad campaigns on Facebook over the past six months, marketers saw a median return on ad sales of three times for campaigns that didn’t include New Feed, which is very solid performance. For campaigns that included News Feed ads, the median return on ad sales was nearly double, at 5.9x.

Sponsored Stories often appear under the headline “Pages You May Like.” These ads use social context and appear as a separate module from page or user posts. Users can click the thumbs-up button to like the page, making it a lightweight engagement for businesses looking to build their page likes.

Page post mobile ads or promoted posts appear directly in News Feed. They don’t require social context, meaning they can target users beyond fans and friends of fans. A prompt to “like” the page is featured at the bottom of the ad.

There are also mobile app install ads that are similar to Sponsored Stories in that they often appear in a separate module, but instead of prompting users to “like” a page, they lead users directly to an app download page. Facebook also launched a type of mobile advertising that targets consumers based on the apps they use through the Facebook Connect feature, which lets users log into millions of websites and apps as varied as Amazon.com, LinkedIn, and Yelp with their Facebook identity. It then targets ads based on that data.

Facebook announced last year that it’s initiating mobile engagement ads, video app install ads, and the ability to bid on ads using cost per action. It’s anticipated that with the roll-out of new Facebook mobile app updates and an increases of mobile users, Facebook’s mobile advertising will become a lucrative channel for online advertisers.

To learn more about how advertising drives online media companies’ revenue, see Why short sellers are missing Pandora’s enormous opportunity.

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