They say that imitation is the best form of flattery, but in the business world it could be the biggest form of competition.
Both Facebook (NASDAQ: FB ) and Twitter (NYSE: TWTR ) are guilty of imitating one another, but aside from user interface tweaks, both companies have gone about their business relatively independently. On Thursday, however, Twitter announced that it will compete with one of Facebook's biggest growth drivers -- app install ads.
The app industry is huge. Apple (NASDAQ: AAPL ) reported $10 billion in app sales last year, and Google (NASDAQ: GOOGL ) brings in about 55% of Apple's App Store revenue from Google Play. Developers are willing to pay for exposure to this huge and growing industry.
How big are app install ads?
Last year, Facebook sold 245 million app install ads. That's just a drop in the bucket for Apple or Google. Apple saw 3 billion app downloads in December alone last year, and Google typically sees even more downloads than Apple.
A few hundred million app installs is just the tip of the iceberg for the market. The current run rate at Facebook is 100 million app install ads per quarter as of the end of last quarter. That will probably continue growing, just as it did throughout 2013. Even if growth slows significantly, and Facebook sells just 500 million app installs throughout 2014, it could represent a large chunk of advertising revenue.
Macquarie Equities Research's Ben Schacter estimates Facebook generates between $2 and $3 per download, but notes some game companies were paying in excess of $4 per install as of October. That rate ought to climb as Facebook attracts more advertisers while growing the number of ads more slowly. As a result, app install ads could make up upwards of 15% of revenue at Facebook during 2014.
Can Twitter compare to Facebook?
Twitter has just 241 million monthly active users with 76% of them accessing the platform through mobile. Facebook, on the other hand, has nearly 1 billion users accessing its mobile app monthly. Twitter, however, has access to over 1 billion mobile users through its acquisition of MoPub.
The MoPub acquisition in October has allowed Twitter to establish its Twitter Publisher Network, which allows advertisers to place ads in apps outside of Twitter. Facebook has been working behind the scenes to extend its Facebook ads to other mobile apps, but has yet to fully launch such a product. Therefore, developers looking to test app-install ads in other apps may choose to utilize Twitter's exchange.
Although both Twitter and Facebook offer excellent targeting, the ability to target users of a specific app may lend itself to higher ad pricing. Additionally, limited advertising space in third-party apps may result in higher ad prices.
Still, Facebook dominates the mobile space, and has, by far, the most popular app. According to the most recent data from Flurry Analytics, Facebook accounts for 17% of time spent on mobile devices. Twitter, comparatively, accounts for just 1.5%. Gaming, however, took nearly one-third of users' time, so Twitter may have an opportunity there with its network, although advertising opportunities will be limited.
Moving the needle at Twitter
Facebook wasn't the first company to provide app install ads, but it's certainly the largest provider today. With billions of apps being downloaded every day, however, developers are looking for a way to stand out from the crowd. The demand for app install ads will only continue growing with the number of apps and smartphones in the ecosystem.
Twitter's revenue is significantly smaller than Facebook's, and if it can even come close to the success Facebook has had with the product, it will be very noticeable in its numbers. At the very least, the premium ad product could help it maintain average ad pricing going forward.
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