Facebook's growth driven by mobile ad boom

Takes some share from Google as its firms up its business model, focusing on quality and differentiation

By Caroline Gabriel

In the two years since Facebook's IPO, the social networking giant has made significant progress in building a mobile business model. That public offering was blighted by uncertainty about how to turn its vast mobile traffic into gold, but its second quarter results show how far it has come in meeting the challenge. The growth in mobile advertising was credited as the primary factor in a 61% year-on-year leap in second quarter revenue, hitting $2.91bn, well ahead of analyst expectations.

Net income rose 137% on the year-ago quarter, to $791m or 30 cents a share. Profit excluding one-off items was 42 cents, well ahead of Wall Street forecasts.

Advertising and promotions on mobile devices now account for 62% of total advertising revenues, up from 59% a year earlier and almost nothing at the time of the IPO in May 2012. Facebook has been stoking the growth by introducing new options such as video and mobile-specific applications, as well as improving the quality of promotions and analytics.

"Facebook just has a better advertising offering now," Shyam Patil, an analyst at Wedbush Securities, told Bloomberg. "It's a higher return on investment for the advertiser and so they're able to pay more money, increasing Facebook's revenue, and much of that is on mobile." The average advert price has more than doubled over the past 12 months and Facebook is working on new value-added choices. Its Creative Labs initiative focuses on experimental apps and has already produced Paper, which makes a magazine-like experience for the social network, and Slingshot.

It is vital that advertising platforms focus on quality and differentiated options in mobile markets, because actual volume of ad impressions is significantly lower than on PCs, so higher fees are critical. Ad impressions for Facebook were down 25% year-on-year, because of the shift of usage towards mobile devices.

There are warning signs for Google here - the search giant is still driving its revenue growth via high volumes of online ads, while the average price of its adverts fell by 6%. That ratio may be hard to sustain as the shift to mobile usage continues, though of course, Google has massive mobile properties to leverage via Android, Chrome and its many search-related services. Facebook has also been diversifying its business, adding features which do not relate directly to social networking, and acquiring the WhatsApp messaging giant.

Facebook is expected to account for more than 22% of mobile advertising dollars worldwide this year, according to estimates by eMarketer, up from 5.4% in 2012. Google is expected to lose a little share, ending up with just over half the market, down from 52.6% in 2012, while Twitter could reach 3% this year.

"Our tools and the products we're building are working," said COO Sheryl Sandberg, adding that Facebook now has 1.5m advertisers - though the costs of supporting and expanding that platform, with a focus on mobile quality, are rising too. Overall expenses were up 22% year-on-year.

Facebook said it now has 1.32bn monthly active users, up from 1.28bn in the prior quarter, with 654m using the product daily on mobile phones. Revenue per user in the quarter was $2.24, up from $2 in the prior quarter and $1.60 a year earlier.

However, CEO Mark Zuckerberg said on a the analyst call that there is still plenty of work to do on mobile. US customers spend an average of 40 minutes a day on mobile Facebook, which is more than any other application, but is still a small proportion of their total time interacting with websites, computers, phones and TVs - nine hours a day.

"I really can't underscore this enough that we have a lot of work to do and we could take the cheap and easy approach and put ads in and do payments and make money in the short term, but we're not going to do that," he said. "We're going to take the time to do this in the way that is going to be right over multiple years."

That means making some long term bets, such as the recently concluded acquisition of virtual reality headset maker Oculus VR, which could contribute to next generation mobile and search user experiences. Zuckerberg added: "I cared really deeply about the 10-year arc of the company", and said he wants Facebook to "help define the next generation of computing".

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