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Business Report

How Facebook Slew the Mobile Monster

The fortunes of the world’s largest social network depend on how much it can earn from mobile advertisements.

Advertising-based Internet companies face a difficult transition from the desktop to mobile devices.

Scarcely a year ago, Facebook was the poster child for Internet companies blindsided by the rapid shift of online activity from computers to smartphones and tablets. Just before its highly anticipated initial public offering last May, Facebook revealed that it wasn’t making “any significant revenue” from its mobile website or app—even though more than half its 900 million members used the service on mobile devices.

facebook page on mobile device
Come on: Facebook has begun placing ads like this one from a California food market in the accounts of users.

The IPO fizzled, and by August, the widening gap between mobile usage and revenues had helped send the social network’s shares plunging to under half their $38 offering price. “We’ve had a bunch of missteps” in mobile, CEO Mark Zuckerberg sheepishly admitted in September.

This story is part of our May/June 2013 Issue
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Behind the scenes, though, Facebook was already finding its footing. From near zero last May, the company’s revenue from ads on mobile devices rocketed to $305 million in the last three months of 2012. That figure amounted to 23 percent of its overall ad sales and helped lift its shares back above $30 in January. “We are a mobile-first advertising company now,” says Gokul Rajaram, Facebook’s product director for ads.

That remains debatable, but Facebook’s experience provides a lesson for anyone trying to cope with the mass migration of computer users to mobile phones and tablets. What Facebook discovered is that integrating ads directly into a user’s flow of natural activities—in Facebook’s case, the main feed where people view updates from friends—works far better than banners and pop-up ads. While these so-called native ads, which mix marketing into content, might be controversial, they look like advertising’s most successful adaptation yet to mobile computing.

A year ago, Facebook faced all the usual problems: small screens, fewer technologies to target potential customers, and gaps in marketers’ ability to measure the impact of mobile ads. These factors made ads look far less effective on mobile devices, and marketers less willing to pay for them.

Facebook’s advertising team was also too preoccupied evangelizing a new kind of desktop Web ad, called Sponsored Stories, to pay much attention to mobile. These ads are actions by a Facebook member, such as “liking” a page or checking in at a store, that marketers can then promote, for a fee, to the member’s friends (see “You Are The Ad”). Zuckerberg viewed these ads as the future of Facebook advertising because real posts from friends were less likely to be ignored.

By early 2012, Facebook was ready to start running them not just in the right-hand section reserved for ads but also on its prime real estate: the news feed, where people spend most of their time on the social network. Executives knew it was a risky step into the unknown—especially when they extended the same type of ads to mobile as well. What if the ads really annoyed people?

Far from it. Sponsored Stories got more clicks. But it was the mobile versions that really took off. They got twice as many clicks and commanded nearly triple the price from advertisers as those on the desktop, according to a subsequent study by advertising agency TBG Digital. By July, the mobile ads were grossing $500,000 a day.

Emboldened, Facebook launched other mobile ads over the summer and fall, including one that allowed makers of mobile apps to urge users to install their games or programs. This was an even bigger leap: It was the first ad in the mobile news feed that didn’t require advertisers to wait for a “like” or other social action to create it. Advertisers instead could use Facebook’s trove of biographical data from user profiles to target likely prospects, as they’re accustomed to doing with traditional ads.

That worked, too. In January, for instance, Cie Games used app installation ads to attract players for its first iPhone game, Car Town Streets. The cost of acquiring users was 40 percent lower using Facebook’s ads than those from other mobile ad networks, and those users spent more inside the game, says Cie Games CEO Dennis Suggs. Even big brands are getting interested. To push in-store shopping during Thanksgiving weekend, Walmart bought 50 million mobile ads from Facebook, rivaling the reach of TV campaigns.

Facebook’s success has exploded some myths of mobile marketing. Advertisers often complain that they can’t run big, flashy ads on tiny screens. But Facebook’s mobile ads take up a  larger part of the screen than ads aimed at desktop computers typically would—one reason they get so many clicks. “Our ads are big and flashy,” smiles David Fischer, Facebook’s vice president of advertising and global operations. And they’re getting more so: some mobile ads now include photographs, and Facebook is actively looking at incorporating video into them.

Everyone, including Zuckerberg, worried that users might balk at ads mixed with posts from friends. So far, that hasn’t happened. Tests that Facebook ran found the insertion of ads reduced comments, likes, and other interaction with news feed updates by 2 percent, a small decline that the company deems acceptable.

For all that, Facebook still trails far behind mobile ad revenue leader Google—which earned $2.2 billion from mobile search and ads in 2012. And as much as mobile ad revenues grew in the fourth quarter, some analysts fretted that growth wasn’t even better, especially since mobile ads could be supplanting desktop ads.

Jacking up mobile ads even more, though, could be a challenge. “They have to be careful they don’t fill people’s feeds with crap,” says TBG Digital CEO Simon Mansell.

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Next in this Business Report
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Mobile computing is the fastest-spreading consumer technology in history, but the real change for the technology business is only just beginning.

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