A year ago, Facebook earned almost no income from the increasing number of people who were visiting its site via smartphones and tablets, and concerns about whether it would be able to do so effectively induced a 29 per cent fall in its share price in the weeks after its initial public offering.
Wednesday’s results show Facebook’s business model has finally caught up with the massive migration to the mobile internet, convincing even its greatest doubters.
“We were wrong,” said Richard Greenfield of BTIG Research. “Facebook’s mobile ad spend crushes our short thesis”.
The social networking company surprised investors and analysts with a 61 per cent rise in its advertising business for the second quarter, totalling $1.6bn in ad sales, well above even the most generous estimates. Its share price rose 27 per cent in response on Thursday, bringing it to just 11 per cent less than its IPO price of $38.
Analysts say those strong numbers show that a variety of ad products that Facebook introduced over the past year are starting to pay off.
“They had new products for all segments of marketers that all lit up this quarter,” said Brian Wieser, an analyst with Pivotal Research.
One key to its success on mobile, however, was the decision to allow ads into the coveted news feed in the second quarter last year. Advertisers had been longing to escape the right hand column of the desktop screen and have their advertisements be placed in a direct line of vision, mixed in with messages from friends and family about newborn babies and last night’s episode of Game of Thrones.
Facebook is part of the fabric of marketing now. They are not the newcomer any more. The question is, where is the growth going to come from
This is of utmost importance for mobile devices, where there is no right hand column at all, and where ads placed in the main news feed are inevitably seen and would make an impression even if the person did not immediately click on the ad.
This change has kept existing advertisers satisfied. It has also attracted small and medium-sized businesses, which will be essential to Facebook’s future growth, to advertise for the first time.
The attractiveness of a spot on the main news feed has allowed Facebook to avoid replacing its digital dollars with mobile pennies – in the US, average mobile ad rates are about a third that of desktop digital ads, but Facebook has managed to keep its ad prices up.
Sheryl Sandberg, chief operating officer, said e-commerce companies, in particular, found success with these ads, doubling their spending in the second quarter.
What convinced them to increase spending was Facebook’s improved measurement capabilities, which gave them proof that an ad on the site will lead to a purchase.
“These marketers are typically very measurement focused,” she said. “We believe our ad products are delivering impressive [return on investment].”
Facebook has had missteps in mobile, too. Its “super app” for Android phones, Facebook Home, essentially flopped. Prices for the HTC First, the phone designed to showcase that “super app”, was slashed from $99 to 99 cents with a two-year contract a month after it was launched.
But with more than 1bn users who are spending more and more time on the site, Facebook has shown, at a minimum, that it is a “bedrock” of advertising budgets, with marketers recognising that “they can’t not buy from Facebook”.
“Facebook is part of the fabric of marketing now,” said Pete Stein, the new chief executive of Publicis’ Razorfish. “They are not the newcomer any more. The question is, where is the growth going to come from.”
While many analysts have adjusted their longer-term outlooks on Facebook due to the strong second quarter, they still caution that a slowdown will probably come, if not in the second half of this year, then in the next one to two years.
Offsetting that will require even more innovative products, with most attention focused on a forthcoming video advertising product, and an eventual opportunity to advertise within Instagram, Facebook’s photo and short-form video service.
But even there, Mark Zuckerberg, chief executive, indicated advertisers will have to wait, just as they had to wait for mobile.
For now, the focus is on “increasing the footprint of Instagram”, he said. “When the right time comes, we’ll think about doing advertising as well.”
Additional reporting by Emily Steel in New York