At last. The long-awaited moment for everyone who uses Facebook's (Nasdaq: FB) app on one of Apple's (Nasdaq: AAPL) iOS devices is here. The social media king finally released a badly needed upgrade to its app. Hear that sound? That's the mass sigh of relief from the armies of people who collectively spent hours waiting for the old version to load or scroll. The upgrade's a big step for Facebook, but it's going to have to climb higher and faster if it wants to realize its full potential with mobile.
It works! Now let's sell some ads
Facebook was born and grew up on the web, and now that it's in adulthood, the company has been slow to accept and adjust to the latest trends. Its old iApp used web architecture, which wasn't the ideal fit for Apple devices more fluent in their native iOS language. Despite the cries and howls of complaints from users -- who rated the former version a lowly two out of five stars on the App Store -- Facebook insisted on sticking with it for a painfully long time.
Well, better late than never. Facebook iOS 5.0 is a real improvement, with the app now a lot quicker, smoother, and far less frustrating than it used to be. No longer will precious user time drain away waiting for photos to load or group pages to open.
Facebook badly needed to improve that software. Mobile, after all, is the present and future of computing, not least in terms of advertising. And no one wants to advertise on a clunky, tough-to-navigate app.
Potential buyers are out there in droves. Research firm eMarketer estimates that total mobile ad spending reached about $1.46 billion in 2011 and will grow around 80% to hit $2.6 billion this year. Then the party will really start to kick -- those figures are anticipated to pop to $4.3 billion next year and $6.5 billion in 2014. In 2016, total spending is expected to top $10 billion.
Be like Google
Mobile is a tough advertising medium requiring cleverness and subtlety. After all, who really wants a bunch of garish ads cluttering the limited real estate of their smartphone screen? This is one big reason why very few companies are realizing the potential spelled out by eMarketer.
One of the early success stories, to no one's great surprise, is Google (Nasdaq: GOOG). The company bet heavy and big on the medium, spending $750 million to acquire specialist AdMob in a deal that closed in 2010. That purchase is already paying off, with Google anticipated to have reaped that same amount in ad spending for 2011, according to eMarketer. That amounted to a commanding 52% of the total market.
Other major players are far behind. Apple, so effective at pushing hardware and bringing in money from apps, is a laggard in the ad space, bringing in only a relatively light $92 million for 6% of the overall pie. In third place was independent shop (and recent IPO) Millennial Media (NYSE: MM), with numbers slightly less than those of Apple.
Facebook is very much aware of this market's potential. As of this past spring, the company had over 900 million monthly average users, over half of whom accessed the network on a mobile device. The problem was, as it stated explicitly in a regulatory filing regarding mobile, "we do not currently directly generate meaningful revenue, particularly to the extent that mobile engagement is substituted for engagement with Facebook on personal computers."
This was reflected in its results: in the second quarter, the company's number of ads delivered in the US dropped 2%, while its tally of daily users grew by 10%. The latter figure was due in no small part to mobile devices.
Two-stage divorce
Facebook iOS 5.0 is a Johnny-come-lately, but behind the scenes the company has been gearing up for quite some time to turn mobile into the massive earner it clearly has the potential to be. "Mobile first" is the phrase bandied about by Facebookies, and it seems the company is truly putting that slogan into practice. Organizational structure has been shifted so that now all product teams create mobile versions of features at roughly the same time as the web iterations.
The company also offers training sessions for selected employees on how to create apps for iOS and Android devices, aiming to mint around 200 new mobile-savvy software engineers by the end of this year.
And the experiential evidence suggests the company is doing pretty well figuring out how to place ads on its app without bothering the heck out of users. Its "sponsored stories," for example, drop an advertiser's spot directly and unobtrusively in the feed of a user when one of his/her friends interacts in certain ways with that advertiser's page.
Discounting for market share
The catch with all of the above is that everyone and their brother aims to jump on this mobile advertising bandwagon. As a result, despite the rise in overall spending, rates are coming down, not least because sellers want to grab and hold as much of that white-hot market as they can. The company with the most to lose, Google, is an assertive discounter; it recently cut the pricing of its in-app spots to match those for its search ads.
So this market is tough and getting tougher. Facebook is to be commended for putting that much-needed zip into its iOS app, despite the fact that it took the company forever to do so. But the harder work lies ahead; the company's shareholders can only hope Facebook won't be as slow to rope in ad revenue from such efforts.
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