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On March 11, mobile-ecosystem analyst Benedict Evans tweeted that "Facebook (NASDAQ: FB ) could soon be booking more revenue from app installs than Apple (NASDAQ: AAPL ) ." That idea seems almost absurd considering Apple booked more than $10 billion in App Store sales last year and is even bigger than Google's (NASDAQ: GOOGL ) Play Store.
Facebook was at least partially responsible for about 100 million app downloads in the fourth quarter. That's a drop in the bucket for Apple, which saw 3 billion downloads in December alone. Facebook, however, gets paid much better per download than Apple or Google, and that could mean Mr. Evans is right.
App install ads
Facebook rolled out app install ads in October of 2012. The idea is simple and takes advantage of Facebook's core strengths. Facebook developed a special ad format that takes users to their respective app stores and allows them to quickly download an app.
So far, it's been a big hit. In 2013, Facebook facilitated 245 million app downloads in Google Play and Apple App Store. The reason is simple: Facebook is able to advertise where the consumers are. Facebook can see which OS you're on. It can see if you're on a WiFi network or 3G. It can see if you've played Candy Crush Saga. It can use all of that data to target ads for mobile apps to people on mobile devices.
Facebook has, by far, the most popular app on smartphones, reaching more than three-quarters of the U.S. audience. Moreover, people are on Facebook all the time. Last year, Flurry Analytics released a report indicating the average mobile Facebook users uses the app for 30 minutes per day.
With nearly a billion users accessing Facebook through mobile devices each month, it's surprising that install rates are this low.
In 2013, app installs grew from 25 million in the first quarter to 100 million in the fourth quarter. In between, Facebook saw sequential growth of 84% in the second quarter, 61% in the third quarter, and 35% in the fourth quarter. Certainly, the growth rate is slowing down, but the absolute growth has been fairly steady.
Facebook is looking to balance supply and demand. Advertisers more than doubled in the second quarter from the first quarter, but the number of app installs didn't quite reach that level. This disparity may indicate Facebook is leveraging demand to increase prices. Ben Schacter of Macquarie Equities Research estimates that Facebook generates between $2 and $3 per download, but notes that some game companies were paying in excess of $4 per install as of October.
At a rate of $3 per install and a conservative estimate of 500 million installs in 2014, it adds up to $1.5 billion. Comparatively, Apple generated an estimated $3 billion off its $10 billion in app sales in 2013, and that number ought to rise. In 2013, Google grossed about half the revenue as Apple, putting it on par with Facebook's potential in 2014. Google App downloads are growing faster than Apple's, however, so Google will likely generate more than $1.5 billion from apps next year.
Nothing to sneeze at
For what Sheryl Sandberg calls "a small but growing category," app install ads are sure to make a real impact on Facebook's mobile revenue this year. The format appears to provide an excellent return on investment for developers, even as Facebook increases the price of its ads. Indeed, app install ads will be part of the reason Facebook ad prices will continue to climb while other companies struggle to monetize mobile users. Perhaps in a few years, Facebook really will generate more revenue from app downloads than Apple.
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