To paraphrase Brad Pitt’s character in the Quentin Tarantino film Inglourious Basterds, Facebook is in the advertising business and, cousin, business is a-booming. The company’s third-quarter advertising revenue increased by 36 percent year-over-year to $1.09 billion, accounting for 87 percent of the company’s $1.26 billion in overall Q3 revenue.
To paraphrase Brad Pitt’s character in the Quentin Tarantino film Inglourious Basterds, Facebook is in the advertising business and, cousin, business is a-booming. The company’s third-quarter advertising revenue increased by 36 percent year-over-year to $1.09 billion, accounting for 87 percent of the company’s $1.26 billion in overall Q3 revenue. That overall figure in turn grew 32 percent from the prior year and slightly beat analysts’ estimates.
But the real story with Facebook’s ad business is less where its numbers are and more where they’re slated to go: in a word, mobile.
Facebook CEO Mark Zuckerberg said in the long run he expects Facebook will be able to better monetize its mobile users per the amount of time they spend on site in app versus desktop users. That should encourage investors, considering that Facebook’s mobile user base has grown 61 percent in the past year to 604 million monthly active users, closing in on its 1.01 billion total monthly active user base that only grew 26 percent year over year. But even in the near term, Facebook’s mobile business is contradicting those who decry the company’s struggles to monetize its mobile users.
Facebook didn’t start running mobile ads until April, but that part of the business is already contributing 14 percent of total ad revenue. During last quarter’s earnings call Facebook revealed that it was generating $1 million a day in ads served in the News Feed. The company updated that number on Tuesday, saying that it reaps more than $4 million a day from News Feed ads with three-quarters of that revenue coming from ads shown in the mobile News Feed.
Beyond mobile, Facebook COO Sheryl Sandberg broke down the company’s advertising business into four different types of advertisers: brand advertisers, direct marketers, local businesses and app developers. She said they would take a similar tack.
While Facebook didn’t exactly highlight any ad products specific to brand advertisers, the implication was that its Feed-centric ads are most appealing to big-budget, reach-hungry brands. But the News Feed is only the most obvious example of Facebook’s new ad product development strategy. Rather than have an ad team pull a Dr. Frankenstein and affix ad units to products developed by other teams within Facebook, Zuckerberg said “we’re building a lot more integrated ad products now.”
“We told every product team they’re responsible for the ad experience in their product,” Zuckerberg continued. “What we’re seeing is across each consumer product, a more tailored ad experience.”
While Facebook is tailoring ad products to its users, it’s also doing so to its advertisers. Case in point: the Custom Audiences product introduced during the third quarter to give advertisers the ability to target existing customers with ads on the social network. That product is particularly appealing to direct marketers seeking new ways to squeeze value from their customer databases. Sandberg said advertisers using the product often saw match rates higher than 50 percent, at times hitting 95 percent of the customers a business asked Facebook to target. That stat is likely helped by the fact that 58 percent of Facebook’s users return to the site each day, with daily active users increasing by 28 percent year-over-year to 584 million users.
Sandberg referred to local businesses as “the Holy Grail of the Internet,” describing it as a segment that would generate a lot of revenue if not for the fact that it’s “hard to get local businesses online.” Although Facebook’s made a pretty good go at it. Sandberg said 12.8 million local businesses have created their own Facebook Pages and that the Promoted Posts product rolled out in May for Pages with less than 400 fans and recently expanded, largely geared toward smaller advertisers, has been used by more than 300,000 Pages, with 25 percent of those Pages being new advertisers.
While Facebook’s couponing ad product Offers is not specifically made for local businesses, that segment likely makes up a solid chunk of the 100,000 pages that have created an Offer since launch. Of the Offers claimed, 30 percent have come from mobile devices, and that share should increase after Facebook added the ability to append barcodes to Offers last month.
App developers have long been a source of revenue for Facebook, be that through serving ads in apps, running their own ads to attract new users or cutting Facebook a slice of the revenue generated from in-app sales of virtual currency or virtual goods. That business is changing. Facebook began phasing out its Credits virtual currency business at the end of June, and its payments business seems to have taken a hit in the following quarter, down 9 percent quarter over quarter to $176 million in revenue (though it did grow 13 percent compared with last year). Part of that may be due to the fact that payments revenue from Zynga dropped 20 percent year over year, but that decline was offset with payments from the rest of the games ecosystem rising by 40 percent over the same period.
Nonetheless Facebook has expanded the advertising opportunities available to developers. Last month it began testing the ability to run ads on non-Facebook mobile sites and apps that are targeted according to Facebook users’ information. And last week it officially launched the ability for developers to run their own ads in the mobile News Feed entreating users to download their apps. That latter ad product could become even more intriguing should Facebook add the ability for users to download the apps without needing to leave Facebook, as hinted at in a company blog post.