App Ads Are Booming Business for Facebook

App ads account for more than half of Facebook’s mobile revenue—and they show how the ad market is changing.

The online advertising industry is worth tens of billions of dollars.

After launching a mobile app in December 2012, the event ticket search engine SeatGeek needed a better way to get lots of people to install it. Driving installations with search ads was expensive, and banner ads were annoying to smartphone users. As luck would have it, two months earlier Facebook had introduced a new type of mobile ad.

Facebook’s “app install ads” run in users’ news feeds amid updates from friends, making it possible to download apps directly from the Google and Apple app stores with just a few taps. An advertiser like SeatGeek can target these ads based on user data gleaned by Facebook, such as where people live or what sports teams they have mentioned in posts, upping the chance they will download and install the app. Last year, app install ads helped drive more than 1.5 million downloads for SeatGeek, contributing to a tripling of gross ticket sales to $155 million. “They’ve been core to our growth,” says Will Flaherty, who heads SeatGeek’s mobile efforts.

This new type of ad is important to the growth of lots of other companies, too—in particular Facebook itself. The social network will not reveal how much app install ads bring in, but firms that help marketers run ads on Facebook believe they account for more than half of its mobile revenues, which doubled to $2.5 billion in the fourth quarter. Others have gotten in on the game, too. Twitter now runs similar ads in its tweet stream, and Google runs them in search results, on YouTube, and within some of its apps.

“2014 was the explosion,” says Simon Khalaf, CEO of the mobile ad and measurement firm Flurry, which Yahoo bought in July. He estimates the worldwide market for app install ads last year at $6 billion.

That sum pales next to search ads, which brought in more than $40 billion in revenues to Google alone in 2014. But the rapid growth of app install ads show that these types of ads are among the most successful ads on smartphones.

The appeal is clear for app developers, whose creations can easily get lost among the more than 1.2 million apps in the major app stores. Like other social ads, app install ads also tend to get more attention than regular banner ads because they look more like posts from friends. And advertisers can choose to pay only when someone actually installs the app. According to the mobile analytics firm Tune, the ads appear to prompt more installations even if people don’t immediately tap an ad.

For all that, app install ads have, to date, had a limited appeal for the advertisers themselves. The biggest spenders on such ads are large makers of online games such as King (“Candy Crush”), Supercell (“Clash of Clans”), and Machine Zone (“Game of War”). Games have short lives, so companies need to keep spending on ads to drive people to new titles.

Some people even think the popularity of app install ads among consumers may reflect something of an app bubble. “It seems you’re up against the Uber of dog grooming or something else all the time,” says Matthew Casertano, senior vice president of game operations at mobile game studio SGN. Competition keeps driving up app install ad prices, to Facebook’s benefit. But if venture capitalists start to cool on app startups, that could cut spending on the ads to promote them.

Despite all that, many signs point to such ads sticking around or even growing in appeal. Ben Legg, chief executive of the digital ad firm Adknowledge, says more than 90 percent of his customers earn a return greater than their app install ad spending, usually within three months. “No one is out there spending $500,000 a month unless they have a revenue model,” adds Jesse Pujii, CEO of mobile ad firm Ampush.

By most accounts, app developers are also growing more sophisticated about determining how valuable various groups of prospective customers are. Facebook has what advertisers believe is highly accurate data on user demographics and interests. Coupling that with improvements in analytics, app developers are getting better at targeting the most promising new prospects. The game developer SGN, for instance, has devised models that analyze data such as the number of times players have won or lost or whether they bought an item in a game. That helps determine likely future cash flows from each individual. The company targets app install ads to people whose demographics, interests, and other characteristics match those of profitable players.

The ads are becoming more sophisticated as well. Facebook introduced video to app install ads in late 2013, and recently starting allowing clips to play automatically when they’re scrolled over. Using a technology called deep linking, ads can now send some customers directly to specific pages within an app (see “The Ad Industry Reinvents the Hyperlink for the Mobile Era”).

Brian Wieser, an analyst at Pivotal Research Group, says brands will move more of their ad budgets to mobile. The upshot, he says: “Mobile advertising and app install ads are still in the early innings of a very long game.”

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