Facebook (FB 3.91%) is undoubtedly the world's most popular social networking site, boasting a fan base of more than 1.2 billion active monthly users. This year has been great for Facebook and its investors. After a disappointing IPO that was followed by a long slump, the stock roared back to life with an amazing recovery to gain close to 100% year-to-date.
The recovery story got even better with the firm posting stellar third-quarter revenues of $2.02 billion. Mobile ads brought home the bacon for the social networking giant, accounting for 49% of ad revenues. The huge 60% growth in mobile ad revenues finally eased earlier fears that Facebook was going to have a rough time monetizing this platform.
But despite the impressive results, market reaction was tepid at best. The biggest concerns by investors were the decision by Facebook not to substantially increase the volume of ads displayed on its pages and, the revelation that the firm was losing its grip on young users.
Volume ads can be detrimental to Facebook
Nate Elliott, a Forrester Marketing analyst, recently questioned the wisdom in Facebook displaying each brand's post to just 16% of its fans. He pointed out that despite the fact that Facebook spews out billions of display ads daily, fewer than 15% of these ads leverage its ever-growing cache of social data targeted at relevant audiences. Forrester did a survey in August this year of 395 eBusiness executives and marketers from large companies across the U.S., Canada and the U.K, Facebook's most important revenue sources.
The Forrester study found that these executives believed that the social networking site creates less business value than many other digital marketing platforms.
What these executives need to understand is that Facebook's ad model is fundamentally different from Google's (GOOG 2.30%). Google displays advertising to a wide cross-section of consumers in a direct response to specific searches conducted on its site. Google's method of displaying ads is therefore a more natural and, perhaps, even helpful way to getting people to view ads that are directly linked to their search keywords.
In sharp contrast, Facebook ads are a different matter altogether. People do not specifically go to Facebook expecting ads to be shoved into their faces and news feeds and, in fact, can find such ads intrusive and unwelcome. Despite the fact that Facebook ads account for about 90% of its revenues, the ads are, in effect, an anti-social offering on the social platform.
In plain simple terms, people expect ads by Google, but Facebook has to be very careful not to upset its fans with on-your-face ads. This fact alone makes it a lot easier for Google to grow its ad revenues than Facebook.
Huge revenue growth
Facebook managed to grow its overall revenues 60% Y-o-Y to 2.02 billion. Its mobile ad revenues came in at $882 million, a huge 478% jump from 2012 third-quarter. Mobile ad revenues jumped from $152 million in third-quarter 2012, to $882 million last quarter, a huge 478% leap.
Facebook has successfully grown its per-user revenue in every single territory, a very good sign indeed. Despite the quarterly $26 million slump in desktop ad revenues, the firm managed to grow its overall ad revenues by 60% to $2.06 billion.The fall in desktop ad revenues is indicative of the global shift from desktop computing to mobile computing and tablets.
Ad per-user revenues in the U.S. and Canada, were up from $3.67 last quarter to $4.19, a significant 14% growth. Per-user revenues in Europe increased from $1.67 to $1.76.
It's not hard to understand the concerns of the executives in the Forrester study, which mirrors those of Facebook investors. If Facebook decides to increase its ad volumes, the short-term effect might be that its ad revenues increase.
But given the peculiar nature of social media marketing, this kind of overt ad displays might eventually lead to Facebook fans leaving in favor of other more ''user friendly'' social media outlets. Facebook has tried to perform a delicate balancing act by keeping the volume of its ads low. It's difficult to fault a revenue model that's producing the kind of growth Facebook recorded.
Active users increase
The second revelation that spooked investors was that young users were not as enthusiastic about the social media giant as before. Overall, Facebook recorded an 18% jump in monthly active users to 1.19 billion.
Young people and teenagers in particular are very conscious about fashions and trends. Facebook has been around for close to ten years and it's difficult to maintain a tight grip on young users for that long. If Facebook can continue growing its user base regardless of age or demographics, its probably going to continue growing its revenues considerably the future.
Instagram ads
Facebook bought Instagram in a billion-dollar deal last year. Up until recently, Facebook was yet to use the video-sharing platform to display ads. But this has now changed since Facebook begun displaying magazine-quality ads on Instagram on Nov. 2 Facebook revealed that it has lined up ads from large players such as Adidas, PayPal, Lexus, Ben & Jerry's Ice-cream and Burberry for the curtain raiser.
Many analysts are optimistic that Instagram, with its 150 million users, will soon become an important source of ad revenues for Facebook. Instagram ads could generate as much as $20-$40 per 1000 impressions for Facebook, which is much higher than the mid-single digits payout that's typical for news feeds ads.
Conclusion
Facebook has finally turned the corner and started generating juicy revenues and profits for its investors. Its mobile ad platform looks very promising and the social media giant has proven that it can not only monetize the platform, but also do a great job at it too. Its huge 60% overall revenue growth and, the recent move to start displaying high-quality ads on Instagram could make Facebook a goldmine in the making.
