Developer Spending on Facebook Ads Continues to Soar

This summer, Zynga CEO Mark Pincus made headlines when he said that Zynga spent a “couple million dollars” on FarmVille’s launch on Facebook. At the time, we’d been heading from many developers that their Facebook Ads spends were ramping up. Now, we’re seeing the trend continuing, with no signs of slowing down any time soon. From what we hear, as many as 7 of Facebook’s top 10 performance advertisers are application developers.

Why is this happening now, when many originally thought that app-install advertising was just going to be a flash in the pan in the early days of the Facebook Platform? There’s a couple fundamental reasons:

1. Many social games are monetizing very well through virtual goods-based business models, and are spending behind their success.

In the early days of the platform, much of the CPI (cost per install) style ad spend came from developers who wanted to accelerate growth, even though they didn’t have the revenue to back it up. Now that more engaging and better monetizing apps have been developed, and the payments ecosystem has matured, improving monetization overall, many developers are now able to spend behind the projected lifetime values (LTV) of app users. Developers are willing to buy an infinite amount of installs as long as the CPI fits their models.

2. Facebook is tightening up viral distribution channels.

Since the Facebook Platform launched, Facebook has continually tweaked its viral channels in order to manage application spam and protect the user experience, while at the same time still providing enough value and opportunity to developers to keep them interested in building for the Platform. For applications that need to grow, these organic communication channels can provide great distribution, but even the best apps can only grow by so many percent per week.

Those that want to ramp up more quickly need to spend on either Facebook Ads or third party Facebook Platform ads from companies like RockYou, Cubics/Adknowledge, AdParlor, LifeStreet Media, SocialCash, and others. Given Facebook’s recent and upcoming changes to the News Feed, invitations, and notifications, advertising channels are becoming increasingly important ones for the largest developers.

Effects on the Platform Economy

Of course, developer bidding wars are good for Facebook’s bottom line, at least for now. Facebook has succeeded in making its paid channel a necessity for accelerating app growth. But there are other effects for the larger ecosystem as well.

1. Acceleration of ads tools ecosystem.

If you’re spending a million dollars a month on Facebook ads, chances are you want to get as sophisticated as you can with your spend as quickly as possible. In the past, everyone had to manage their Facebook Ads campaigns by hand. Now that the Facebook Ads API is enabling new tools that can manage bulk volumes of ads and optimize bids in real time, we expect developers to be many of the Facebook Ads API tools pioneers.

2. Other advertisers getting priced out in some audience segments.

If you’re a brand advertiser, it is getting harder to compete with developers who are spending more. We are hearing that, especially on the Facebook Platform, developers are now pricing out some “traditional” brand advertisers. This is partially due to the fact that developers are no longer able to share any data with Platform ad networks, so advertisers can’t spend as much as they used to for more targeted ads. Facebook changed its policies on data sharing with Platform ad networks this summer, prohibiting third party ad networks from being able to access user data.

Going Forward

The market is getting more saturated with developers and games, so eventually things are going to get more expensive. As more advertisers come online, prices will continue to rise, and as users get more inundated with app ads, conversion could fall. Nevertheless, both Facebook and Platform ad networks have to be pleasantly surprised with how healthy developer ad spending is at this point. It’s the main way Facebook is directly financially benefiting from the rise of social gaming – though more programs, like its in-house payments service and ad network, are still on the way.

To dig deeper into the virtual goods market, check out our new report: Inside Virtual Goods: The US Virtual Goods Market 2009 – 2010.

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