A Look Back at Facebook’s Third Quarter

[Editor’s Note: The following article presents a summary of the Facebook Quarterly Business Review, a comprehensive look at Facebook’s business over recent quarters. The Facebook Quarterly Business Review is available through Inside Facebook Gold, our data and research service tracking Facebook’s business and growth around the world.]

Facebook is a fast-moving company, pushing out additions and modifications to its platform with a regularity that’s impressive for a company of its size. To keep up with all the changes, we publish our Facebook Quarterly Business Review every three months to Inside Facebook Gold subscribers, providing an essential view of what’s happening for advertisers, brands and developers.

Below, we summarize some of our findings from the most recent quarter.

Web Growth

During the quarter, Facebook announced that it had finally broken 500 million users worldwide. Every region except Europe experienced double-digit growth over that three month period; Africa, Asia and Latin America grew fastest, averaging gains 16.7 percent.

Those three fast-growing regions include many developing countries in which there are still only small groups of Facebook users, relative to the developed countries in Europe or North America. But in absolute terms, growth rates are high even in emerging regions; for instance, we found that in an average month, there are 20 countries in which at least one percent of the total population joins Facebook.

Facebook’s challenge going forward is cracking into a handful of tough markets. But over the quarter, sprouts of growth have already appeared in  previously intractable markets like Japan, South Korea and Brazil; only China and Russia look entirely unlikely at this point, but Facebook is even chipping away at the latter through mobile initiatives.

It’s also worth noting that Facebook has now been translated into over 100 languages.

Mobile Growth

Mobile is Facebook’s great frontier after the web. Already, 150 million users worldwide access Facebook through mobile devices. Over 75 million of those users are on between smartphones like the iPhone, BlackBerries and Android devices, according to AppData stats.

In many countries, however, there are still few smartphones. To break into these more difficult markets, Facebook has entered into over 200 partnerships with mobile carriers worldwide (all are listed in the full report).

The company also negotiated deals with 66 mobile operators in 56 countries to temporarily offer web access to the social network for free, without charging users for data.

In Russia, it’s trying to break into the market through mobile carriers Beeline and MTS, who will offer users access through 0.facebook.com, the text-only mobile version of Facebook. In India, another tough market, Airtel offered free access to m.facebook.com to 130 million customers in July and August.

It’s not clear how Facebook will evolve its mobile offerings. For now, the company still isn’t breaking down mobile usage by country, and has yet to create a mobile ad platform.

Products and Platform

Facebook has been unceasingly active in changing its platform this year. The early part of the year saw the introduction of the Open Graph, the Like button, instant personalization, and Community Pages about interests. The company also battled over privacy issues and made multiple adjustments to the new products.

In July, Facebook launched Questions, which prompted a feed redesign: users can now specifically share status, questions, photos, links or video. While several of those new fields were inspired by the success of Twitter and other services, Facebook’s reason for releasing Questions, and the potential of the service, remains unclear.

For marketers, several other changes that Facebook made are significant. In addition to the Open Graph launch, Facebook also added Insights tools to track interactions, helping to show the virality of specific pieces of content.

Separately, the right hand of the page now includes an Events box, which allows users to create private or public events. And Credits, the platform’s in-house virtual currency, also became much more significant over the quarter.

The biggest change taking place on Facebook may be nearly invisible to users — that it is something other than a destination site.

As we note in the report, Facebook has become strategically indifferent to whether its users engage and interact with its services on the Facebook.com domain or on external sites, so long as they connect back to the social network through the “like” button, social plug-ins or other experiences requiring a Facebook log-in. Hundreds of thousands of websites have adopted one of Facebook’s eight plug-ins, from Like buttons to boxes showing a friend’s activity on the site.

Advertising Growth

In the report, we look closely at Facebook’s four sources of revenue: performance advertising, brand advertising, Microsoft advertising and virtual goods.

Out of the four, only Microsoft advertising is decreasing. Our research indicates that performance ads are currently the company’s biggest share of revenue. Facebook has made four major changes and improvements that impact all performance advertisers:

  • Broadened age targeting that blurs targeting boundaries
  • Changes to favor CPC (cost-per-click) over CPM (cost-per-impression) ads
  • Advertising Accounts that allow advertisers to more easily work with app developers
  • Further development of the ads API, helping to create companies like AdParlor and Nanigans

Revenue

Facebook has now been “free cash flow positive” for exactly a year now, meaning that it can finance its own growth. As it heads toward the end of this year, Facebook revenues are continuing to ramp up strongly, we believe.

How fast? Earlier this year, we revised our estimate of Facebook’s 2009 revenue to $600 to $700 million. At that point, we estimated Facebook’s 2010 revenues could reach $1.1 billion.  However, its success in brand and performance advertising this year could put it well over that number.

The full Facebook Quarterly Business Review offers a condensed view of hundreds of individual changes and developments, from in-depth looks at the subjects mentioned to including strategy, investments, important executive appointments, competitors and acquisition activity. For full access, simply visit Inside Facebook Gold.

The full table of contents is below: