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Why You Need to Learn About Mobile Commerce

We are living in a rapidly evolving world, and as investors it is important to understand trends today that will impact the companies of tomorrow. Take a look at how the growth of mobile commerce is of utmost importance to Google  (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) and Facebook  (NASDAQ: FB  ) moving forward.

Digital advertising growth and shifts
According to a recent eMarketer report, digital ad spending is likely to hit $140.15 billion, with a sizable $32.71 billion of that on mobile ads.  Additionally, the report goes on to say that, "In the most mature digital advertising markets. . . we expect mobile ad spending to take a majority share of digital ad spending in the near future."

The reason for this is very simple -- more people than ever are using mobile devices to service their e-commerce needs, especially those in developed countries. This is particularly exciting because it is usually harder to find such explosive growth in more mature markets.

comScore MobiLens reported that the total number of residents in the EU-5 (UK, Germany, Italy, Spain, and France) who accessed retail websites via mobile devices grew 42% year over year between January-March 2014. Also, the number of EU-5 residents who bought a product via mobile device increased 43% year over year in the period between June-August 2013. 

Why is this important? Take a look at Google's recent earnings call to understand how taking advantage of this could fix one of the company's biggest challenges.

Decreasing ad prices from shift to mobile
Last quarter, Google's total revenue grew 22% year over year. Fueling this was a 24% increase in aggregate paid clicks, which was slightly offset by a 6% decrease in aggregate cost-per-click, also known as CPC. 

Declining CPC is an issue that has plagued Google for a few quarters now. According to CFO Patrick Pichette, one of the major reasons has been a shift in device mix. Google's CPC has suffered as a result of the increasing number of mobile views.

Mobile screen space is smaller than desktop screen space, and as such, it is difficult to display as many ads. The picture below demonstrates this with a search for "buying new laptop" on a smartphone versus desktop.

Source: Google

Mobile commerce growth creates opportunities
However, as more consumers choose to shop from mobile devices, Google has a great opportunity to take advantage of advertisers looking for mobile ad space. Hopefully, the company will make the most of this opportunity with its rollout of AdWords Enhanced Campaigns,  which allow advertisers to bid across multiple devices on one easy platform.

Google is aware of the value of mobile ads, as it reported last quarter that international mobile search campaigns have three times higher conversion rates than other channels. This is beginning to show in the numbers, too, as CPC sequentially, or quarter after quarter, was flat.

Facebook's opportunities with News Feed ads
While Facebook does not face the same problems as Google, mobile commerce arguably represents an even greater opportunity for the social media giant.

In 2011, Facebook fundamentally changed the user experience with the introduction of the Timeline. This lead to the creation of the News Feed, and what would be the very basis of Facebook's mobile strategy.

Source: Facebook

Last quarter, Facebook reported mobile ad revenue of around $1.3 billion, making up 59% of total ad revenue. This incredible growth, from no mobile ad revenue when Facebook first went public, can be attributed to the success of Facebook's News Feed ads.

These ads have also helped the company avoid declining average price per ad that many other publishers have faced with the shift toward mobile. In fact, last quarter, Facebook reported that its average effective price per ad displayed increased 118% year over year as a result of News Feed ads making up a larger part of its overall mix.

For users of Facebook's mobile app, the ads appear seamlessly as they habitually scroll down their News Feed to see what all of their friends are up too.

With more people buying things through their mobile devices, more ad dollars were spent to connect with Facebook's 609 million mobile daily active users.

Foolish takeaway
Investors need to be aware of technological trends shaping our world. In this case, understanding how mobile devices have changed consumer habits can lead to insights about Facebook and Google's strategies to attract advertisers.

Look for the effectiveness of these strategies in the coming years. If they are successful, improved pricing will complement viewership growth and help them reach new heights. 

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Xuebing Wang

An investor who enjoys piecing together the puzzles of a businesses future prospects. Finding out where there may be underappreciated growth prospects to be considered.

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