There's no denying there is significant revenue to be had in downloadable apps. Though Google (NASDAQ:GOOG) (NASDAQ:GOOGL) is the undisputed leader in volume -- an estimated 75% of all app downloads last year originated from its Google Play store -- Apple (NASDAQ:AAPL) takes the cake when it comes to revenue, generating a whopping $10 billion from apps in 2013 alone. Recognizing the potential of app revenue, particularly from gaming, Google is going all out in its efforts to woo developers, and is even expected to surpass Apple in app-related revenue by 2018.
As the mobile market grows, app downloads will certainly go along for the ride -- and that's where Facebook (NASDAQ:FB) enters the picture. Facebook's first developers conference in two years, held this past April, might have flown under many investors' radar. But bringing app developers into the fold is a lucrative business and one Facebook CEO Mark Zuckerberg wants to join.
New research indicates that Facebook and Google are uniquely positioned to take full advantage of mobile users' disdain for opening their wallets.
Free is a very good price
According to a recent study (by Zogby Analytics for the Digital Advertising Alliance) of mobile app users across the U.S., only a fraction are willing to fork over their hard-earned dollars to pay for apps in order to avoid in-app advertisements. In fact, only 2.7% of mobile users surveyed said they would rather download "more expensive apps with no ads or in-app purchases." Free or low-cost apps supported by in-app purchases -- spending a few dollars to get a leg up on the gaming competition, for example -- were the apps of choice for just 10.1% of users.
Nearly 36% of the mobile users contacted said they prefer free or low-cost apps, even if it meant being "subjected" to in-app advertising. A whopping 39.6% of users said they don't even download apps, which means those opting for ads in lieu of paying up front is an even more significant piece of the app-using pie.
There are a couple reasons why app users prefer not to pay for applications even if it means seeing ads. One, free is a very good price, and who wants to pay for something if they don't have to? Also, over 70% of users already see ads on their mobile devices, so in-app advertising is hardly new. Naturally, many users don't click on any ads, but relatively speaking a lot of them do, and that's good news for advertising specialists such as Facebook.
Playing to Facebook's strength
If we know anything about Facebook, it's that it collects user data at a nearly incomprehensible rate and even more importantly, it knows how to use it. Targeting the right ad, to the right person, at the right time has become a science with the seemingly limitless amount of data available, and Facebook does it as well as anyone.
As the aforementioned study made clear, mobile app users are just fine with in-app ads if it means they don't have to shell out money for downloads, which is ideal for Facebook, as well as the other data gatherer of note, Google. Another arrow in Facebook's in-app ad quiver is not only are mobile users used to seeing ads on their devices, they're not shy about clicking on them: particularly in-app spots. Facebook, according to an industry analyst, is already generating an estimated 20% to 25% of it revenues from in-app ads, which equates to over $2 billion annually.
Is it any wonder Facebook hosted its F8 developer's conference? Expanding its suite of app download alternatives – ala Apple and Google – offers a world of opportunity. Why? Because bottomline, in-app ads work. Of the 25.1% of mobile users who said they "often" or "sometimes" click on ads, spots of the in-app variety are far and away the most likely to garner user's attention. Over 28% of folks clicking on ads prefer in-app spots compared to just 18.8% of standard browser advertisements.
When you add it all up, bringing developers into the fold will prove to be a boon for Facebook revenues, because it's current $2 billion plus from in-app revenues is just the tip of the iceberg. Zuckerberg and team are more than happy to provide users with new free or low-cost apps, thanks to the new app developers via its dev conference efforts, then do what Facebook does best: utilize its reams of user data, combined with its internal algorithms, to grow its already impressive in-app ad revenues.
Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Apple, Facebook, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Facebook, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.