Facebook Is Growing Through Risky Business

BY RYAN TATE

Facebook COO Sheryl Sandberg. Photo: World Economic Forum/Flickr

It’s easy to get caught up in Facebook’s new earnings numbers; revenue and adjusted profits spiked impressively in the first quarter, and mobile business boomed. But if you listen closely to what Facebook executives say as they release those stats, it’s clear the social network has set down a risky path that banks on following users ever more closely and selling to advertisers ever more aggressively.

In first-quarter financials released yesterday, Facebook said revenue rose 38 percent to $1.46 billion and that mobile advertising climbed to 30 percent of ad revenue from 25 percent of ad revenue in the prior quarter; analysts had expected revenue growth of just 36 percent. Adjusted earnings, meanwhile, were 12 cents per share, flat compared to last year and below analysts’ estimates of 13 cents per share.

In a call reviewing those numbers, Facebook executives crowed about how more people are spending more time with Facebook on more platforms than ever before, how advertisers large and small are plowing money into the social network, and how Facebook is investing in innovative new products like Facebook Home and Graph Search.

Then they talked about change. Change is inevitable at Facebook; though the company made $5 billion in revenue last year, it did so largely by targeting people on desktop computers with relatively straightforward advertising that for the most part paid by the click. These days, Facebook’s users are shifting to mobile, and advertisers want ever-more sophisticated targeting options.

So Facebook is moving to meet both camps, and doing so with impressive speed. But it’s far from clear whether its new business model will work as well as the old one.

Take mobile advertising. Facebook has earned appreciative backslaps from Wall Street from going from zero to 30 percent mobile ad revenue in just three quarters after remaking its flagship app and rolling out a host of new mobile ad options. Trouble is, much of the money Facebook rakes in on mobile comes from app makers, who pay Facebook to push their apps at users most likely to be interested in them, based on data from their friends and phones. These are, generally speaking, speculative advertisers, often venture backed, hoping to get rich off their software – exactly the type of businesses that tend to disappear when there’s a cyclical downturn in the now-booming tech sector. (emphasis added)

When probed by analysts yesterday, Facebook declined to hint at how much of its mobile advertising comes from these app makers. But Facebook brass bragged about the app install business early and often during yesterday’s call. “One of the developments that’s been interesting is seeing how big an opportunity mobile apps can be for Facebook,” Facebook CEO Mark Zuckerberg said just four minutes into the call. “It’s clear now we can create a lot of value for developers… and we’re starting to see real revenue through selling mobile app installs.” COO Sheryl Sandberg later added that mobile app installs “performed very well this quarter,” driving 25 million downloads and being used by 40 percent of the top 100 grossing apps across iOS and Android. “Recently the app install ad product… is showing some real traction,” Zuckerberg reiterated later in the call. (emphasis addes)

Facebook is walking another precarious road with how it sells to its large, longtime advertisers. Facebook was once content to target based on data it collects directly from users and to get paid mainly when users click ads. It is rapidly evolving into a nexus where information about things you do far from Facebook, both online and offline, comes together with advertising that is often bought and customized in the blink of an eye through instant-bidding platforms like Facebook Exchange. Facebook can now select an ad based on what you’ve bought in the grocery store, where else you’ve been on the web, and even what you’ve been searching for on other sites. (emphasis added)

As its targeting grows more sophisticated, Facebook is also hinting that it would like to expand how it bills advertisers; it could follow its users after they merely glance at an ad, watching their online buying habits and real-world store visits and billing the advertisers if any transaction occurs. (emphasis added)

Sandberg didn’t say if or when Facebook might introduce such a billing system, which would presumably be enabled by data-tracking technology called Atlas that Facebook acquired earlier this year. But when pressed by an analyst she acknowledged that Facebook is trying to grow its business selling ads that are merely viewed rather than clicked.

“Our focus with Atlas is on impression based ads,” Sandberg said. “As people have looked more holistically at all the ad spending they’re doing, what they find is that it’s not just the last click that matters but all the impressions leading up to that click. Importantly, we also drive sales offline, and offline people aren’t clicking through to purchase at all — they’re actually walking into a store.”

As it collects more and more data on users, Facebook argues its ads become more relevant and thus more palatable. And clearly, the company would like to extract more money from advertisers in exchange for such smartly-aimed spots. The question, as Facebook builds the all-knowing ad-based revenue engine of the future, is whether users and advertisers are willing to go along for the ride. (emphasis added)

http://www.wired.com/business/2013/05/facebook-is-growing-through-risky-business/

Editor's Note:
New business model: develop the most intrusive app imaginable, and let the bidding wars between Google, Microsoft and Facebook begin. Make millions!