Saturday, February 6, 2016

Facebook cashes in on digital advertising



At first glance, there might appear to be plenty to cheer about for most companies in the digital advertising business. At $137bn excluding China, according to Magna Global, their industry grew last year at a healthy 15 per cent.
But look past that headline and the picture, for most, starts to look less rosy. Virtually all of the growth was accounted for by just two giant Silicon Valley companies that now loom large over the advertising world: Google and Facebook. With signs that both are cementing their relationships with big marketers in an attempt to swallow a larger share of the digital pie, there seems little chance of the dominant duopoly being challenged. 

On Wednesday, it was Facebook’s turn to flex its mobile advertising muscles. The social networking company had pulled off a remarkably quick transition of its business to mobile devices. From a standing start in early 2012, mobile advertising grew to account for 78 per cent of revenues by the third quarter of last year.
With fourth-quarter earnings, Facebook has shown it is in position to capitalise on the acceleration of spending on mobile advertisers as brands belatedly seek to follow their audiences to smartphones.
Wall Street had expected the company’s revenues in its seasonally strongest quarter to jump by about 20 per cent from the third quarter, echoing a similar surge at the end of 2014. Instead, they soared by 30 per cent, to $5.84bn.
The message from founder Mark Zuckerberg and other executives as they discussed the results on an earnings call with Wall Street: Facebook has spent the last few years building massive audiences for its series of mobile services. It is now time to cash in.
The significance of the latest numbers was not lost on investors, with the company’s shares rising 15.5 per cent on Thursday. Alphabet, the parent company of Google, which will report earnings on Monday, basked in Facebook’s reflected glory, with a 3 per cent rise.
When it comes to digital advertising, “Facebook and Google eat the world”, said Brian Wieser, analyst at Pivotal Research. “Everyone else is showing very little share growth.”
To judge by comments from its leaders this week, Facebook’s appetite is far from being sated.
The final quarter of last year was “a defining moment for mobile marketing,” said Sheryl Sandberg, chief operating officer. But she added that the fourth-quarter bounce was only the first sign advertisers were swinging their budgets over to mobile — and with 1.4bn visitors to its main Facebook app on mobile devices each month, along with more than 400m to its photo-sharing app Instagram, Facebook believes it has what she called “the two most important mobile advertising platforms”.
Part of the challenge has been how to educate new advertisers fast enough.
“We shipped a lot of ad products this year,” Ms Sandberg said. Among the formats behind the strong fourth-quarter earnings were Dynamic Product Ads, designed to make it easier for advertisers to show off an entire catalogue of products.
But Ms Sandberg conceded that the company has plenty of work to do before advertisers come to feel as comfortable with its various formats — and, in particular, the analytics that show their performance — as they are with traditional forms of advertising.
If mobile advertising on Facebook’s core social networking service is starting to take off, then the company is already preparing the next platforms for its mobile expansion. All but two of the top 100 advertisers on Facebook have also advertised on Instagram, according to Ms Sandberg: but most of these have diverted part of their existing Facebook budgets to try it out, rather than allocating extra advertising dollars.
The company is bent on a “share of wallet” strategy to persuade advertisers to place an ever-larger portion of their digital budgets on its various services, said Mr Wieser. Thanks to services including Instagram and its video ad products, he added, Facebook is well positioned to keep expanding its market share — at the expense of flagging rivals such as Yahoo
According to Mr Zuckerberg, messaging service WhatsApp is close behind Instagram in terms of commercialisation. It has nearly 1bn users and, even more important to him, its free service has become actively used by public figures and companies that see it as a way to connect with a large audience. Such a move is normally the precursor to a full advertising service, Mr Zuckerberg said — one of his strongest indications that Facebook is poised to try to cash in on its $19bn acquisition.
Messenger, Facebook’s other messaging service, added nearly 250m new users last year taking it up to 800m. But Mr Zuckerberg said it has yet to draw the attention of companies and prominent individuals, leaving it further away from commercialisation.
Given the strength of Facebook’s latest quarterly performance, however, even Mr Zuckerberg found it hard on Wednesday to find the superlatives to match the occasion.
Asked how he felt about demand for Facebook’s Oculus virtual reality headset, which will start shipping in March, his enthusiasm momentarily flagged: “Yes, I am happy. I don’t show much joy, but I am happy.”
After delivering such a powerful demonstration of the company’s growing might in digital advertising, that was a lapse most investors were prepared to forgive.

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