Facebook had a great set of earnings it presented last week.
They continue to show an incredible financial trajectory which the company has been on for the last 18 months.
After stumbling out of the gates following their IPO upon concerns that the service would not be able to migrate its user base to mobile, they’ve done just that.
All the while, they’ve not only managed to increase their user base size to well over a billion (1.28 billion), but they’ve also shown an increase in the engagement of their users. In the last quarter, they were able to show that 63% of their monthly active users (MAUs) were also daily active users (DAUs), up from the prior quarter.
They’ve made prescient acquisitions like Instagram, which has grown from 20 million MAUs when they bought them to 200 million today – almost as much as Twitter.
Another engine in the comeback of Facebook is the explosion in advertising revenue.
Their most recent quarter saw ad revenues grow 82% year-over-year. Mobile accounted for 59% of their ad revenue, up from 53% in Q4.
What’s at the core of this mobile ad revenue? What’s the secret sauce of Facebook’s recent financial success?
It seems to me that it’s fundamentally a story of app install ads and not banner ads (at least not yet).
On last week’s call, Zuckerberg cited the importance of App Installs – beyond any other type of ad:
On mobile, App Installs has been one of our best performing ad products, driving over 350 million installs to date. Over 60% of the top grossing apps on the Apple App Store and Google Play use Mobile App Ads, which is pretty impressive performance for a product that launched in January last year.
How much do these App Install ads matter to Facebook? We don’t know because they won’t say.
Justin Post of BofA Merrill Lynch specifically about this on the call:
I know you gave us the number of total apps, but maybe how that revenue as a percentage of total, how important it is to you?
Sheryl Sandberg’s response was:
On mobile app ads, we’ve seen really strong adoption and this is a very nascent but growing market. I think people sometimes think that a lot of our mobile ad revenue is coming from this one type of ad and our mobile ad revenue is very broad based.
When management was asked about App Install pricing trends, they said that overall ad pricing was up and that they buyers of App Install ads were not just gamers but more broadly based because “everyone who is building apps on mobile needs installs and we have the number one products out there for delivering that.”
Does this mean that banner ads of Facebook don’t work? No. In her prepared remarks, COO Sheryl Sandberg, used a case study of how Canadian retailer SportChek had seen much better responses on Facebook to their ads than what they experienced with traditional paper circulars.
The relevancy of such ads should continue to grow. However, I have heard several outsiders make the point that Sandberg referred to in her answer which was that Facebook heavily relies on these App Install ads to drive their revenues. Those with this view believe that Facebook’s reluctance to share more details about percentage of overall sales made up by App Install ads points to their desire not to draw attention to it. It’s no different to why Marissa Mayer from Yahoo has not shared details on what percentage of her sales comes from mobile while Facebook is happy to share it.
If it’s true that Facebook does heavily rely on these types of mobile app install ads, there’s nothing wrong with that but they should expect fierce competition from others over time for that business and they’re also vulnerable to if there is a pull back in VC investment into app companies that heavily rely on marketing their apps through Facebook to prove traction.
In summary, Facebook has built an accessible mobile service which has a powerfully large audience that’s very attractive for any mobile app developer. They’ve smartly capitalized on that to build a thriving business. It’s probably more important to Facebook than they want to let on to competitors.
It will be interesting to watch how feverishly others try to go after these lucrative types of ads in the coming months.