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Facebook Earnings Will Offer Insight Into Mobile

7:59 AM, Apr 29, 2013   |    comments
A Facebook employee holds a phone that is running the new 'Home' program (image by Justin Sullivan/Getty)
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John Shinal, Special for USA TODAY

Is Facebook managing the transition to mobile as well as Google? We'll find out this week.

With Google's latest financial results showing that the search giant has gotten better at managing the growth of low-cost mobile ads, Facebook CEO Mark Zuckerberg this week will give investors a look at how well his company is managing the same trend.

Facebook releases first-quarter results after the close of markets Wednesday. Equity analysts who cover the company expect, on average, that sales rose 36% to $1.4 billion, helped by more sales of mobile ads.

Mobile ads are key to Facebook's future revenue growth because users who access the social network from smartphones or tablets tend to be more active than those who do so from desktop PCs. The downside is that mobile ads fetch lower rates than desktop ones.

Facebook is adding mobile users at a faster clip as more global consumers access the Internet from these mobile platforms. Its recent partnership with handset maker HTC to begin selling a Facebook-centric smartphone shows the company wants to have more control over this transition.

More posts and photos on the social network mean a larger inventory of ads to sell, and mobile ad sales are contributing a growing part of Facebook revenue. They accounted for 23% of revenue in the fourth quarter of 2012, up from 14% in the quarter before that.

Google hasn't disclosed specific mobile revenue figures in its last two quarterly reports. But Wall Street analysts estimate that the company now gets about 14% of its total revenue from mobile ads, more than double the percentage of a year ago.

Investors who bought into the Facebook IPO last May - or who merely charted the stock's performance in the four months that followed - will remember that concerns over the impact of mobile ads were a big reason Facebook got a 40% haircut soon after it hit the public markets.

The reason - apart from over-exuberant IPO investors - was that mobile ad rates were far lower than rates for ads served onto a desktop.

One report last summer from Mary Meeker, a partner with the venture capital firm Kleiner Perkins Caufield & Byers, pegged mobile rates at one-third to one-fifth the value of desktop ads, depending on the vertical ad market (finance, sports, travel, etc.)

But subsequent reports from various market research firms have shown that the gap has been narrowing, and Google's report two weeks ago also suggested that trend is well underway.

Google disclosed that it had significantly slowed the downward pressure its growing mobile business was putting on the average price of a Google ad click.

Whereas the rate of decline in Google's so-called cost-per-click metric was 16% as of last July, on a year-over-year basis, Google slowed the rate of decline to 4% for the quarter ended in March.

The company said it did so by updating its search algorithm to look for ad placements on both desktop and mobile platforms - such as smartphones and tablets - simultaneously. If that type of approach becomes standard for ad buyers, the unit ad rates for desktop, smartphone and tablet platforms may soon converge.

Facebook wants to attract some of the same corporate marketing dollars that now flow to Google, by giving online advertisers better results for their dollar than Google's search technology can.

One recent report from market researcher IDC showed that Facebook sold almost as much mobile advertising as Google did in 2012.

Even while Zuckerberg is trying to pry ad dollars away from Google with the HTC phone - which piggybacks on Google's Android operating system - Facebook is building an ad market of its own.

The value of Facebook ads is derived from the company's knowledge of all the relationships and preferences of its users, something online marketers can now tap into thanks to the Facebook ad exchange, launched last summer.

That's why investors should pay attention to what Zuckerberg and other Facebook executives say about the exchange - as well as mobile ad rates and revenue growth - during the company's conference call this Wednesday.

The company's ad markets are still nascent and fluid enough that even the best Wall Street analysts can't be sure of what Facebook's operating profit margins will be over the long term.

But after this quarter, retail investors should have a better idea of how the rise of mobile ads will affect Facebook's business.

John Shinal has covered tech and financial markets for 15 years at Bloomberg BusinessWeek, San Francisco Chronicle, Dow Jones MarketWatch, Wall Street Journal Digital Network and others.


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