Facebook juggles user experience, mobile ads

The midday stock share price of Facebook is seen at the Nasdaq Market site in New York, U.S., on Thursday, August 16th, 2012. Photographer: Peter Foley/Bloomberg *** Local Caption ***

The midday stock share price of Facebook is seen at the Nasdaq Market site in New York, U.S., on Thursday, August 16th, 2012. Photographer: Peter Foley/Bloomberg *** Local Caption ***

Published Oct 24, 2012

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Brian Womack

Facebook is set to post another quarter of slowing revenue growth after struggling to wring money from advertisers seeking to connect with users of mobile devices.

In the second earnings report since its May initial public offering (IPO), the company may say third-quarter sales had risen 29 percent from a year earlier to $1.23 billion (R10.6bn), the average of analysts’ estimates compiled by Bloomberg. That is less than the 32 percent year-on-year rise it posted in the second quarter and a 45 percent gain from a year earlier in the first quarter.

A growing proportion of Facebook’s 1 billion users are checking their accounts via tablets or smartphones instead of personal computers. That shift has helped send shares tumbling by almost half since the IPO on investor concern that mobile ads are less effective and bring in less revenue. And although Facebook has started sending more marketing messages to mobile users, it has yet to prove that ads on smaller screens are attracting attention without alienating its target audience.

Monetising mobile has been an issue,” said Joe Bonner, an analyst at Argus Research, who rates the shares as hold and does not own them. “If you can’t sell ads to those people, you’ve got a problem.”

Facebook, which was due to report earnings yesterday after US markets closed, is projected to have profit, excluding certain costs, of 11 cents a share. In last year’s third quarter, the company had $954 million in sales.

Beyond desktops

Shares of the California-based company fell 1.7 percent to $19.32 at Monday’s close in New York. Facebook has lost more than $40bn in market value since its May 17 IPO, when it sold shares at $38 apiece, or 107 times its trailing 12-month earnings – a price that made it more expensive than 99 percent of all Standard & Poor’s 500 index companies at the time.

One of the executives leading the effort to move beyond its traditional desktop business is Jeff Kanter, who was named mobile-ad products manager about a month before the company rolled out its first such service in March. Kanter, who has been at Facebook for five years, said the company was working to strike a balance between pursuing the right mobile advertising and ensuring it did not turn off users.

The company has rolled out seven new mobile ad services this year, including those that enable companies to sponsor stories and promote postings in mobile news feeds.

“We’re really focused on building the right products,” Kanter said. “We are trying to find the right experience.”

It is a big challenge. In its first year in the running, Facebook is likely to rank only sixth in US mobile advertising revenue for 2012, with just 2.8 percent of the market, according to EMarketer. Google, which is number one, is estimated to hold 55 percent, up from 52 percent last year.

Yet Facebook users are increasingly moving to mobile. About 60 percent of the company’s more than 1 billion users are accessing the service on mobile, compared with about 47 percent in the third quarter of last year. Ads that are popular on the desktop do not easily translate to mobile devices, where the smaller screens make it trickier to push marketing efforts, and therefore are less lucrative, according to EMarketer.

“There’s always the question of real estate,” EMarketer analyst Debra Williamson said. “For every ad that Facebook is selling on mobile, it’s bringing in less money than it would, on average, on a desktop.”

Different approach

Still, the company aimed to stand out with a different approach to mobile advertising, using data on user preferences and connections to improve marketing messages, Kanter said. Instead of slapping on a banner ad that took up about 20 percent of the screen, Facebook wanted to “insert a story” that included an advertiser’s message straight into a user’s news feed, which included text and photos from friends.

“We’ve been really wondering how we can transform the ways that businesses and people connect,” he explained, adding: “We’ve always thought: How can the ad experience be addictive – where if we actually took this away, users would want it back?”

Not everyone is convinced. Advertisers who wanted to reach users to promote their brands generally preferred display ads that featured bigger graphics, said Karsten Weide, an analyst at IDC. At the same time, marketers that do not mind simpler text ads designed for an immediate response – like those Facebook’s mobile service offers – do not receive the same results they might get by advertising on Google’s search engine, he said.

In March, Facebook rolled out Sponsored Stories as its inaugural mobile ad service, allowing companies to promote content that a user’s friends have signalled they “like” or interacted with in some way. The social network then added Promoted Posts, in which companies can highlight marketing messages to their fans and friends of fans.

Kanter has tried to promote mobile ads throughout the company, helping woo more interest from other Facebook teams. At a recent “hack” session, engineers came up with a new ad product that might be rolled out next year, he said.

“Facebook is a mobile-first company,” said Gokul Rajaram, the head of ad products at Facebook. “We want every monetisation product to be mobile first as much as possible.”

Fab.com, an online marketplace for high-end goods such as furniture, clothing and artwork, would more than double ad spending on Facebook this year to at least $20m and planned to spend $1m or more on mobile advertising, partly because of the social network’s new offerings, chief executive Jason Goldberg said.

The retailer, which tries to test early ad products, had found particular success with Facebook’s new service that encourages members to download promoted applications, based on user targeting developed on the desktop, he said.

Coming back

“We’ve been kind of out in front in the innovation cycle of Facebook and try to help get it right,” Goldberg said. “We keep coming back to Facebook.”

Still, Fab.com had found less success with Sponsored Stories, where engagement was harder to measure, Goldberg said. Fab.com was working with Facebook to help improve its usefulness, he said.

While Kanter would continue to roll out new services to woo advertisers to mobile, he said he was focused on making sure the messages did not turn off members who were accustomed to ad-free feeds. As sales of phones and tablets outpace PCs and networks get faster, the company’s success in making money from mobile users may depend on his ability to find that balance. – Bloomberg

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