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How Incremental Will Mobile Ads Be For Facebook?

How Incremental Will Mobile Ads Be For Facebook?

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Facebook’s progress in mobile has been spectacular. Starting from almost zero in ad revenue at the start of last year, here are the numbers they recently posted:

•    Monthly active users up 21% YOY to 1.15B
•    Daily active users by 27% to 699M
•    41% of its $1.6B Q2 ad revenue ($656M) came from mobile.
•    75% rise in mobile ad revenues in a span of just three months
•    Mobile ads CPM: $4.48 in Q2, up 25%
•    Mobile ads CTR 1.36% vs. 0.58% for desktop
•    Overall revenue up to $1.81B from $1.18B YOY

Nothing but good news here, and everybody at Facebook should be proud of what is undeniably an extraordinary accomplishment.

Still… there’s something about those last two bullet points…

Are Higher Mobile CTRs Sustainable?

Right now CTRs are strong. Still, while higher CTR is undeniably a good thing, being three times better than nearly zero is still pretty low. If you’re a DR marketer, Facebook ads are plenty cheap enough to make the math work. But it’s less exciting if you’re a brand marketer. Are these higher mobile CTRs sustainable? I’m not entirely optimistic.

The ads are a novelty. Will consumers tire of them? Facebook would say, “no problem, advertisers will learn to make more engaging ads”. This is the way things should work, but in digital marketing they rarely do. When CTR and engagement rates dip, creative gets worse, not better. The fastest way for digital marketers to “fix” poor-performing ads is to sweeten the offers and put “CLICK HERE” in bigger, bolder type. The ads look worse, but the spreadsheets look better – and management will always reward pretty spreadsheets faster than it will reward pretty ads.

Trading Desktop Dollars For Mobile Dollars?

In the desktop environment, Facebook is typically “always on” in a tab — especially during the workday. Users dip into their Facebook feed when they take a break and then go back to work.

An open question is, how incremental will Facebook’s mobile usage be? There is some limit to how often even the heaviest users will check their Facebook feed – and the more ads in the feed, the less engaging that feed will be.  As TechCrunch recently pointed out,

“Facebook (says) mobile advertising revenues will eventually outstrip desktop ad income. (…) If mobile advertising revenues continue at their average rate of the past few quarters, Facebook should earn precisely as much from desktop and mobile advertising platforms in the current quarter.”

It’s entirely possible that we’ll see desktop ads for Facebook flatline as usage and ad dollars shift to mobile. Mobile will still be incremental for Facebook, but once usage patterns settle in growth may be elusive.

The Noise-To-Signal Ratio

If you’re a Facebook mobile user, one in five updates in your newsfeed is already an ad. That’s a pretty high “noise-to-signal” ratio, and I’m guessing Facebook determined it by testing among users to find out how many ads are too many. If so, that means there isn’t a whole lot of headroom for Facebook to gin up profits by putting more ads in the stream.

If that’s true, Facebook stock may be overpriced. After its earnings announcement, it was trading at 149 times earnings – more expensive than 99 percent of the companies in the Standard & Poor’s 500 Index, according to data compiled by Bloomberg.

What’s more, even with Facebook projected to take 13% of the global mobile ad spend in 2013, it still lags well behind Google, which dominates and is projected to take 56% of the market.

The Glass Half-Full Scenario

In fairness to Facebook, everything I’ve written here so far is a glass half-empty assessment. Here’s the glass half-full argument.

•    Nobody (me included) expected Facebook to post the mobile numbers that they just did. I admire Facebook’s ambition. They try big things, and they often get it wrong. But as they’ve just proven, when they get it right, they can get it right in a very big way.

•    Facebook’s powerful new data partnerships with Acxiom, Datalogix, Epsilon, and BlueKai have the potential to grow the desktop ad business significantly. The ability to target hashed lists of existing and potential customers may be irresistible to advertisers. Targeting on mobile is significantly harder, for a lot of reasons. But if some of this capability extends to smartphones and tablets – and this seems inevitable over time – it could boost mobile revenues quite a bit.

•    Facebook hasn’t even launched video ads yet. This has the potential to be a game changer: there’s talk of a price tag of $1M per spot.

What Do You Think?

I can argue either side of this one – in fact I’m pretty sure that I just did

What have I missed that makes you more bullish or more bearish on Facebook than I am?