Facebook's third quarter numbers this week have delivered, albeit belatedly, on a promise echoed widely during the social network's IPO. It's been a tough five months or so for Facebook's stock but signs that Facebook is finding its feet in the mobile game have given investors something to cheer about.
However, it would be far too premature to asssume that Facebook has worked out the magic formula to increase its revenues and more completely monetise their service.
There are a variety of options available for Facebook to monetise, and if they are to do so successfully, they will have to engage in several of these strategies.
One of the options available to Facebook is to develop tools that leverage the user data available to improve click rates of adverts and to expand on the products available to businesses. In July, Facebook reported a 58 per cent increase in their average Cost Per Thousand impressions (CPM) in their Global Facebook Advertising Report.
An example of this type of innovation is the recently launched “Sponsored Results”, which allows businesses to buy ads in the typeahead search results, which the company calls “one of the most used features on Facebook.” Advertisers can target exact pages, profiles, places or apps that they want their company’s advertisements to show up next to.
This is a slight variation from the search engine bid model, where companies bid on phrases or terms that they want their advert to appear next to. Unlike traditional search engine marketing, Sponsored Results cannot link directly to sites off-Facebook, unless that site has integrated with Facebook. An advantage that Facebook offers is that you can target the advert by demographic, interest and category. Ads can also include a short promotional message.
Another example includes the promoted posts service, launched earlier this year. This service allows personal users and businesses to promote posts to ensure they are seen more often.
However, although Facebook has achieved success in innovating and driving revenues through this approach, it seems doubtful that these initiatives will deliver large scale improvements to their bottom line.
Something that may improve their bottom line is Facebook Exchange (FBX), which sees Facebook adopting a technique used by ad-sellers for years.
For the general public, FBX means we will see more ads on Facebook for companies whose sites we’ve visited. When we visit the site of a brand participating in FBX, a cookie will follow you. Behind the scenes, Facebook’s system pings the advertisers for a real-time bid. If the bid is high enough, the ad is displayed to a cookied person when they next visit Facebook. The adverts appear in the right sidebar and the service is also in real-time, so advertisers can deliver time-sensitive campaigns.
Given that Facebook controls 25 per cent of the display ad inventory on the internet, according to comScore, the availability of FBX will have a significant impact on Facebook; some analysts estimate that this initiative will increase the valuation of Facebook’s advert business three times over.
Making money from mobile
This initiative by itself is unlikely to save Facebook though. By far the greatest challenge Facebook faces is monetising their increasingly mobile audience. Almost twenty per cent of users are now bypassing the website entirely, and this figure continues to grow.
“Approximately 102 million mobile MAUs [Monthly Active users] accessed Facebook solely through mobile apps or our mobile website during the month ended June 30, 2012, increasing 23 per cent from 83 million during the month ended March 31, 2012,” Facebook said in a quarterly report.
Facebook is likely to rank only sixth in US mobile advertising revenue for 2012, with just 2.8 per cent of the market, according to EMarketer Inc. Compare this to Google Inc., which is No. 1, and who is estimated to hold 55 per cent, up from 52 per cent in 2011.
Facebook has started sending more marketing messages to mobile users, placing promoted posts and sponsored applications within Mobile Feeds. These services ensure that promoted posts are seen by users, and provide a way for Mobile Application and Game companies to buy prominent exposure for their apps in the mobile News Feed.
So thing are seemingly on the mend at Facebook but it won't take much for this week's euphoria to dissipate. Maintainin an upward trajectory will require Facebook to prove that ads on smaller screens are attracting attention without alienating their target audience,or that their offering will alleviate investors’ and marketers’ concerns.
That's easier said than done and Facebook still has a long road ahead of it before it can truly transform its growing legion of users into hard, cold cash.
Anneliese Urquhart is the co-founder and CEO of event digital marketing startup Jedo