When Facebook Inc (NASDAQ:FB) announced the launch of Graph Search earlier this year, the market seemed underwhelmed. Graph Search is great for finding new friends and getting restaurant recommendations. However, investors didn’t see it posing a real threat to Google Inc (NASDAQ:GOOG).
Yet, Graph Search was just a small step in Facebook’s plans to beat out Google. Last Thursday, it made another with the purchase of Atlas from Microsoft Corporation (NASDAQ:MSFT).
ROI
The biggest problem brands have with Facebook Inc (NASDAQ:FB) advertisements is that there’s no great way to measure return on investment (ROI). Unlike Google, where the attribution of keyword search to ad clicks to website conversions is quite clear and traceable, no such system exists on Facebook.
Atlas provides the tools to show how users engage with Facebook Inc (NASDAQ:FB) ads. More interesting, however, is that marketers can use Atlas to track campaigns on websites outside of Facebook, across desktop and mobile, and even compare Facebook ads to traditional media like TV.
Once marketers begin using these tools to advertise on Facebook.com and track their off-Facebook campaigns, Facebook can use the data to tweak, test, and improve the efficacy of advertising on its website. Proving the value of advertising on its site will give Facebook the ability to raise pricing to the same levels as Google.
Mobile
Perhaps the most exciting thing about the Atlas purchase is that it gives Facebook Inc (NASDAQ:FB) a leg up in the race to solve the mobile advertising puzzle. Atlas Product Director of Ads Gokul Rajaram points out, “One of the big things we hear from marketers and agencies is that the current ad serving systems do not support mobile.”
With more than half of users accessing its website through mobile devices, Facebook Inc (NASDAQ:FB) is committed to building a mobile device ad serving solution for Atlas. Such a system will provide marketers with detailed analytics for marketers to analyze the efficacy of mobile advertisements versus desktop. It also provides Facebook with the data necessary to improve ad placement, and test new ideas.
Currently, mobile ads garner about half the price of desktop. This is one of the main reasons mobile ads contributed less than one-quarter of advertising revenue in the company’s most recent quarter. Detailed analytics will allow advertisers to improve the effectiveness of mobile ads, and Facebook to increase its mobile advertising prices.
Ad network
When Google bought DoubleClick in 2007, it expanded its reach from search advertising to display advertising on other prominent websites. Microsoft was quick to snatch up DoubleClick competition aQuantive, of which Atlas was a part, in an effort to compete. Now, Facebook will look to do just what Microsoft couldn’t in creating an ad network capable of competing with Google.
Facebook’s current presence outside of its own website is relatively low-key, but nonetheless very valuable. The “Like” button exists anywhere content is published. (Including here. Go ahead and click that button to the left.) Couple those data Facebook collects from “likes” with a small policy change the company made in May of last year and a powerful ad publisher like Atlas, and external ads seem like a logical next step.
However, Facebook Inc (NASDAQ:FB) is still far away from developing an ad network to compete with Google’s. Atlas isn’t a full-fledged ad server, so there’s still some engineering that needs to take place. In the meantime, Facebook needs to work hard prove and improve the worth of its on-site advertisements as mentioned earlier. When it shows that its ads work really well on its own website, it can begin to compete for ad dollars elsewhere on the web.
The advantage Facebook has over a company like Google is that users more or less explicitly tell Facebook their interests through likes, fan pages, and wall posts. Lucy Jacobs, COO of Spruce Media (a major Facebook media buyer) said,
“Facebook's traffic is so great that an external ad network could easily increase revenues by 3x.”
What does this mean for Google?
In short, it means Google will soon have increased competition in the advertising space. The size of Facebook’s user base and traffic is about the only thing that comes close to the popularity of Google. The advantage of easily gathered information about users’ interests will be difficult for Google to overcome based on keyword searches and email messages.
Facebook wants to become the hub for all online advertising. Perhaps Google will extend its AdExchanger and other analytic services to Facebook before that becomes a reality. At least marketers will still be using a Google service to track ad efficacy on Facebook if the company elects to go that route. Otherwise, a mass migration to Atlas seems likely, as marketers want to compare Google ads to Facebook ads as well as all other sorts of marketing campaigns.
Down the road, a Facebook ad network could put pricing pressure on Google as the two compete for digital real estate. Additionally, the company will need to improve its mobile ad serving solutions at the same pace as Facebook, as it’s a major focus for both companies these days.
All in all, Facebook poses a much bigger threat than Microsoft ever did when it owned Atlas. The company already operates a website that rivals the popularity of Google’s, and has millions of searchable data points collected from users. Google can definitely hear the footsteps behind it, and this acquisition is only the latest. Expect many more developments from Facebook as it continues to try and close the gap between the two.
COMMENTARY:
Facebook Mobile Ad Revenue Performance Surprises Analysts in 2012, Effect of Graph Search On Ad Revenues Still Unknown, Acquisition of Microsoft Atlas Could Prove Pivotal, Mobile Ad Revenues for 2013 Could Exceed $1 Billion
Facebook is making quick progress in growing its mobile advertising business. It eventually sees 20% of all Facebook ad spend going to mobile. That’s a big boost from October 2012's earnings call report when Facebook said 14% of its ad revenue came from mobile. Meanwhile, 71% of Facebook ad spend targeted to mobile phones goes to Android, further proving Facebook has to focus more on Google’s OS.
Facebook Desktop vs Mobile Ad Revenues - Proportions for the year 2013 (Click Image To Enlarge)
Unlike their paid-search counterparts, Facebook mobile ads cost more and generate fewer clicks than ads shown on the Facebook PC site. By comparison mobile paid-search ads cost less and deliver higher response rates (CTRs) than PC search ads, according to previously published data from Marin Software.
According to social marketing platform Kenshoo, its data shows that Facebook mobile ads are currently priced at a 70% premium over desktop ads. That makes sense considering Facebook often shows seven or more ads per page on desktop. That means users are less likely to look at any single ad. On mobile, though, a single ad can take up most of the screen and therefore may be more likely to make a real impression on users.
Below is the average cost per click for ads on the PC and in mobile on Facebook. Kenshoo explained that ads on the PC are likely to covert 4X as often vs. mobile ads. Here conversion is defined to include Likes, app installs, event registration or other transactions.
Average cost per click for ads on the PC and in mobile on Facebook - Kenshoo (Click Image To Enlarge)
Where tablets are concerned, the iPad sees 97 percent of the Facebook mobile ad spend/revenue. But on smartphones Android grabs the lions share: 71 percent to 29 percent for the iPhone.
Facebook answered the big question of whether it’s transitioning to become a mobile ad company by noting in its October 23, 2012 earnings report that 14% of total ad revenue from Q3 2012 came from mobile — about $150 million. This surprised everybody, including eMarketer, which had forecasted in September 2012 that Facebook would only generate $72 million in U.S. mobile advertising revenues for the entire year 2012, and $387 million for the year 2013.
U.S. Net Mobile Ad Revenues, by Compny, 2011-2014 - eMarketer - Sep 2012 (Click Image To Enlarge)
Although Facebook is very upbeat about its mobile ad revenue prospects going into 2013, about half of its total advertsing revenues are from overseas sources. Average revenue per users in the U.S. and Canaday averaged $3.40, compared to $1.37 in Europe, $0.58 in Asia and $0.47 in the rest of the world. This huge difference in average revenue per user is going to be a huge problem, and Facebook will need to find a way to increase average revenue per user outside the U.S. in order to meet its lofty goal of $1 billion in mobile ad revenues for 2013.
Facebook Average Revenue Per User - Q3 2010 through Q3 2012 - Facebook (Click Image To Enlarge)
Facebook is continuing to see more mobile usage of the social network. In its Q4 2012 earnings report, the company shared that it has 680 million mobile active users, up 57 percent year over year. This number is even more important because its also the first time Facebook has seen more mobile users than desktop users. For the fourth quarter 2012, Facebook has seen its total advertising revenue increase 41 percent year over year and worth $305 million.
In the third quarter and the first nine months of 2012, mobile advertising revenue as a percentage of adverting revenue was 14% and 6%, respectively. As mobile advertising was not offered prior to the first quarter of 2012, comparisons to prior year are not meaningful. Advertising revenue grew primarily due to a 27% increase in the number of ads delivered during both the third quarter and the first nine months of 2012 and to a lesser extent, due to a 7% and 5% increase in the average price per ad in those same periods.
The acquisition of Microsoft Atlas in March 2013, will allow Facebook to provide its advertisers much better ad analytics and a more accurate way of measuring the effectiveness of their advertising and measuring advertising ROI's. When you combine this with the ad placement capabilities of the new Facebook Ad Network and improvements to its advertising API, you have the potential of increasing mobile advertsing revenues dramatically, if all these tools can deliver as promised.
Facebook introduced Graph Search on January 16, a personalized social search app on the site. Graph Search could forever transform the Facebook experience by offering "a never-ending path of quirky discovery" -- one that is designed to keep users hooked on the social-networking site, according to one reviewer, Jennifer Van Grove, on the widely read tech website CNet.
But if Facebook's vast stockpile of users' likes and recommendations poses a significant competitive threat to Google, experts say the new search tool won't cause major damage to Google's business in the near term. Facebook's stock fell slightly Wednesday on January 17, for the third day in a row, suggesting that investors don't feel the new feature is an immediate game-changer.
Facebook Graph Search is still in beta, and the company is rolling out the service slowly, offering it initially to just a few thousand people who signed up for a test program. (I am still on the waiting list). Danny Sullivan, a veteran search analyst and editor-in-chief of the blog Search Engine Land said he's fascinated by the new feature's possibilities, but he remained cautious saying during an interview.
"It will probably take a little while for people to get used to doing searches that they don't even think they can do."
In a similar vein, financial analysts said the new tool opens the door for Facebook to sell lucrative advertising based on users' searches, which is the mainstay of Google's multibillion-dollar business. But Facebook said it's not selling ads tied to the service for now. And tech analyst Karsten Weide of the IDC research firm said the company missed a bigger opportunity.
Weide said.
"If they committed to doing Web search and built a Web search engine that was turbocharged with social search, too, that would give Google a run for its money."
I tend to agree with Weide, but for Facebook to become a dominant player in search engines, it would have to spend billions in R&D and several years, to develop a competitive search engine, and I don't think it has the talent. Facebook would be invading Google's space, and represent a potential threat, and I don't think Google will take it lying down -- patent lawsuits would be the order of the day.
So far beta users have not fully explored Graph Search's full potential. Many are still confused in how to use the new social-driven search engine. Finally, no one knows what affect Graph Search will have on Facebook's mobile ad revenues, but you can bet that advertisers are definitely anxious to measure their ROI's on both desktop and mobile ads on Facebook, and so far Facebook has failed to deliver.
Google Faces Mobile Monetization Challenge As Desktop Search Activity Slowsdown and Mobile Search Increases
On Tuesday, January 22, 2013, Google announced strong fourth-quarter earnings, and the stock rebounded from a dip over the last week, climbing 5 percent in after-hours trading.
Google reported fourth-quarter revenue of $14.42 billion, an increase of 36 percent over the year-ago quarter. Net revenue, which excludes payments to the company’s advertising partners, was $11.34 billion, up from $8.13 billion. Net income rose 7 percent to $2.89 billion, or $8.62 a share.
The fourth quarter is generally Google’s brightest because it makes much of its money on retail ads that run during the holiday shopping season. This holiday season was the first that Google charged e-commerce companies to be included in its comparison shopping engine, and these so-called product listing ads contributed to its bottom line.
Google reported revenue that was lower than analysts had expected. Google warned the previous week that analysts’ expectations were off target because Google sold Motorola’s set-top box division during the quarter and so did not include it in the quarterly results. Still, even including that division of Motorola, Google’s revenue would have missed expectations.
But a closer look at the results shows that while Google continues to be a moneymaking machine, its most lucrative business, search on desktop computers, is slowing, while Google has not yet figured out how to make equivalent profits on mobile devices.
Jordan Rohan, a Stifel Nicolaus analyst said.
“You would expect Google to be a key player benefiting from mobile, but that hasn’t played out in the last year.”
The price advertisers pay Google each time someone clicks on an ad, known as cost per click or C.P.C., decreased 6 percent from the fourth quarter a year ago, falling for the fifth consecutive quarter on a yearly basis, though not as much as some analysts had feared.
The cost per click has been declining largely because advertisers pay less for mobile ads, and more people are using Google on their mobile devices and fewer on their desktop computers.
Google has been trying to improve its mobile products — from developing new kinds of mobile ad campaigns to building devices like the Nexus 4 smartphone — and its executives say it is a matter of time before the numbers improve. Already, in the fourth quarter, the cost per click rose 2 percent from the previous quarter.
Google CEO Larry Page told analysts during a conference call after the company's earnings had been announced.
“We’re in some uncharted territory because of the rapid rate of change in these things, but I’m very optimistic about it. I think the C.P.C.’s will improve as the devices improve, as well.”
Google’s problems monetizing mobile tarnished its usual strong holiday shopping sparkle. Consumers are increasingly shopping on phones and tablets, yet Google and other companies have not yet figured out how best to profit from mobile users.
One problem is that advertisers pay about half as much for an ad on a mobile device, in part because they are not yet sure how effective mobile ads can be. Another challenge is that consumers increasingly use apps, like Yelp or Kayak, to search on mobile devices instead of using Google.
And even when consumers use Google for mobile searches, they are often doing so on Apple devices like iPhones, for which Google has to pay Apple a fee. Those types of fees are large — equivalent to 25 percent of Google’s revenue in the quarter.
The shift to mobile is happening as Google’s biggest, most lucrative business — desktop search — is slowing. The share of clicks on Google results that happen on desktop computers has fallen to 73 percent from 77 percent in the last six months, while the share of clicks on tablets and smartphones has increased to 27 percent from 23 percent, according to data from Adobe.
The problem is that clicks on retail ads on tablets, for instance, cost about 16 percent less than they do on the desktop, according to Adobe. The price of clicks on retail ads on tablets rose 16 percent over the last year, but on smartphones they fell 11 percent.
As the desktop search sector slows, Google has a new search competitor to contend with: Facebook, which last week introduced Graph Search, a personalized social search on the site. Graph Search is still in beta, and will be rolled out very slowly. No one knows what affect Graph Search will have on Facebook's mobile ad revenues, not how this will affect Google.
Google has also recently become a maker of mobile devices, both by acquiring money-losing Motorola and by producing the line of Nexus devices with manufacturer partners.
EMarketer projects Google has a 93.3% share of the $1.99 billion U.S. mobile search ad market – a $1.86 billion haul. Spending on mobile search ads domestically is expected to jump 55% to $3.6 billion next year, with Google holding down a 92.4% share.
Courtesy of an article dated March 4, 2013 appearing in Insider Monkey, an article dated October 23, 2012 appearing in TechCrunch, an article dated January 6, 2013 appearing in Marketing Land, an article dated January 30, 2013 appearing in TheNextWeb, an article dated February 6, 2013 appearing in Advertising Age, an article dated January 22, 2013 appearing in The New York Times, and an article dated January 17, 2013 appearing in the Mercury News
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