Facebook’s ad network and the evolution of mobile app distribution

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Facebook announced last week that it has begun a limited rollout of a proprietary mobile ad network, allowing advertisers to purchase ad inventory in other publishers’ apps. By developing an advertising infrastructure that will exist in parallel to Facebook’s own social platform, it is accomplishing two very essential, mobile-driven strategic goals:

  1. It is building out an ad business that isn’t dependent on the content dilution of its users’ news feeds;
  2. It is further establishing its social graph as the bedrock of mobile distribution and discovery.

Mobile advertising is incredibly important to Facebook. In October, Facebook’s stock price jumped by 12% after the company announced in its third quarter earnings release that its revenue had increased by 60%, quarter-over-quarter, on the back of strong growth in mobile advertising.

This growth – which signalled, as some interpreted it, that Facebook had “figured out” mobile – was due in large part to the introduction of ads into its mobile app’s news feed. A small sacrifice to the user experience (early tests by the company revealed a 2% drop in user activity as a result of news feed ads) was tolerated given the massive revenue potential of Facebook’s most valuable real estate; when Facebook put a for sale sign up on the news feed, public markets rewarded the company and its ability to seize the mobile opportunity. Mobile marketing analyst eMarketer estimated at the time that mobile ad spending on Facebook would account for nearly 16% of the global total in 2013, up from a little over 5% in 2012.

But continuous growth in Facebook’s ad business via the news feed is not a sustainable proposition: Facebook’s difficult relationship with teenagers in developed markets is well documented, and user base growth in its highest ARPU markets seems to have slowed. A growing ad business requires either a growing user base or a higher level of ad density in the product. With its user base growth decelerating in the markets that advertisers are most interested in reaching, Facebook would need to pursue the latter option to maintain its ad revenue trajectory, meaning even more ads in the news feed.

That’s obviously not an attractive design evolution; it could alienate users and ultimately undermine the value of news feed ad placements. Instead, by developing its own ad network, Facebook is able to capitalize on the continued growth of smartphone shipments against stagnating growth in smartphone penetration in developed markets without diminishing the appeal of its product to users.

But what’s more, in building out an ad network, Facebook can tightly integrate its own social graph into the fundamental mechanics of mobile distribution, strengthening its position against the broad threat of “unbundling” on mobile. Just as Millennial Media acquired Jumptap and Twitter acquired MoPub in land grabs for valuable mobile user profiles and data collection infrastructure, Facebook’s new mobile ad network will benefit immensely from the data its social graph can lend to targeting. And the more developers that integrate Facebook’s API into their apps for advertising, the more data the company will accumulate.

Facebook’s mobile app install product is already considered one of the most effective and granular acquisition channels available to mobile apps; by expanding the reach of its ad placements into 3rd party apps, Facebook will not only increase its volume of ad placements but also improve its targeting capabilities for each placement as it gathers data from users in 3rd party apps that don’t use Facebook mobile.

In utilizing the Facebook social graph, mobile marketers can target ads to users not only on the basis of geography, but also based on those users’ behavioral histories and profiles on Facebook: page likes, age, gender, interests, etc. The scope of data available about users on Facebook is enormous, and that data is of acute and immense value to mobile marketers, who must grapple with relentlessly increasing marketing costs in ever more crowded app stores.

The data Facebook’s social graph affords mobile marketers will likely price individual ads at a premium (many developers are targeting the same lucrative segments of users) but improve overall margins as impressions are optimized to not be irrelevant. And as Facebook’s ad network grows, the company will learn more about mobile users not already within its ecosystem, adding further value to its product by improving targeting performance.

In other words, with each ad placement, Facebook becomes not only more ubiquitous but more indispensable; by opening its social graph up to ads served throughout the mobile ecosystem, Facebook will produce an integral layer of data into which the machinery of mobile app distribution will deposit its roots.