For Facebook, it still comes down to making money on mobile

Though only running mobile ads for a year, the social network is dependent on the nascent revenue stream to drive growth.

Jennifer Van Grove Former Senior Writer / News
Jennifer Van Grove covered the social beat for CNET. She loves Boo the dog, CrossFit, and eating vegan. Her jokes are often in poor taste, but her articles are not.
Jennifer Van Grove
4 min read
Facebook CEO Mark Zuckerberg James Martin/CNET

When Facebook checks in with Wall Street for its quarterly review on Wednesday, it will hand in results for mobile advertising for just the fourth time and reveal its first full-year report card on revenue from mobile ads.

By most accounts, Facebook is expected to do well on the mobile front and make close to one-third of its advertising revenue from mobile placements, according to analysts' consensus. It would be a remarkable achievement, one that comes in the nick of time to save Facebook from a decaying desktop business.

From zero to last-minute hero

RBC Capital Markets is particularly bullish on the subject and expects Facebook to pull in $487 million from mobile, which would be good enough for 34 percent of the firm's projected $1.43 billion second-quarter ad revenue estimate. Goldman Sachs holds a more conservative perspective and is predicting that Facebook will make $425 million in mobile ad revenue.

Whatever the number Facebook reports, it will be a marked improvement from the infinitesimal amount that Facebook made from mobile advertising at this time last year. Then, Facebook said it was bringing in $500,000 per day from mobile ads. Now, Facebook's mobile revenue may come in as high as $5.4 million a day, or up 980 percent from the year ago quarter.

Facebook first offered advertisers the chance to reach its burgeoning mobile audience, which now includes more than 751 million people, through ads in the News Feed at the start of June 2012. The offering was a milestone moment for the newly public company as it faced mounting concerns about its ability to make money from people who were shifting attention away from the desktop, where Facebook historically had made 100 percent of its money.

By October, Facebook was ready to go full steam ahead with mobile app install ads, its second mobile ad offering, which allow developers to pay to promote their iOS and Android applications to Facebook members. The unit has proved immensely popular, particularly with game makers trying to climb the social network's leader board. Facebook said 3,800 developers purchased mobile install ads during the first three months of 2013.

The first real fruits of Facebook's mobile harvest arrived in the third quarter of 2012 when the social network announced that it made 14 percent of its advertising revenue, or around $150 million, from mobile. The yield doubled in the next quarter with 23 percent of advertising revenue, or $306 million, coming from mobile. Facebook grew mobile revenue again to $375 million in the first quarter of this year for 30 percent of ad revenue.

Mobile is everything

Facebook's revenue from its desktop business is expected to remain mostly flat, if not slightly down from a year ago, as advertisers spend less on placements in the right-hand sidebar and even more members migrate to the social network's mobile applications. Average monthly unique visitors to Facebook's desktop properties in the U.S. decreased by 10 percent year-over-year, according to comScore Inc. Minutes spent per visitor on desktop in the U.S. is also down 13 percent from one year ago.

Mobile must fill in the blanks.

U.S. digital ad spending by type. eMarketer

The ad industry is also shifting more of its dollars to mobile. eMarketer expects Facebook to take in one in three mobile display ad dollars in the U.S. this year. The firm also anticipates little to no growth in spending on desktop ad formats, but exponential growth in spending on mobile formats in the next few years. Mobile will account for nearly half of digital ad spending by 2017 (46.3 percent), up from 11.9 percent in 2012 and 18.2 percent this year, eMarketer said in a June report.

As the market's appetite for mobile grows, Facebook will fight rivals Google and Twitter for ad dollars. The social network's appeal will depend on how well it can continue to attract a larger audience, keep people entertained for longer periods, and stay cool.

The jury's still out as to whether such feats are possible. Facebook has done a satisfactory job keeping people on Facebook, and games like Candy Crush Saga are seemingly encouraging the social network's 665 million daily visitors to come back often. But there are plenty of signs of waning interest, at least from tweens and teens who are finding more entertainment from Snapchat and a crop of competitive mobile messaging applications.

There's also little to no evidence to suggest that Facebook's most ambitious product initiatives are working as planned. Graph Search is basically ad-free, has yet to make its way to mobile, and may not actually change the way people search. Facebook Home, the suite of social-networking services for select Android devices, is still a dud, also ad-free, and limited in appeal to a shrinking group of people who want Facebook all the time.

So despite a year of phenomenal progress on mobile, Facebook's shares may stay stuck in the mid-$20s, even if the company's report card includes the big-picture marks Wall Street expects: earnings of 14 cents per share on total revenue of $1.62 billion.