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Facebook’s Slowing Sales Growth Shows Mobile-Ad Struggle

Facebook Inc. (FB) is set to post another quarter of slowing revenue growth after struggling to wring money from advertisers seeking to connect with users of mobile devices.

In the second earnings report since its May initial public offering, the company may say third-quarter sales rose 29 percent from a year earlier to $1.23 billion, the average of analysts’ estimates compiled by Bloomberg. That’s less than the 32 percent year-over-year rise it posted in the second quarter and a 45 percent gain from a year earlier in the first quarter.

A growing proportion of Facebook’s 1 billion users are checking their accounts via tablets or smartphones instead of personal computers. That shift has helped send shares tumbling by almost half since the IPO on investor concern that mobile ads are less effective and bring in less revenue. And though Facebook has started sending more marketing messages to mobile users, it has yet to prove that ads on smaller screens are attracting attention without alienating their target audience.

“Monetizing mobile has been an issue,” said Joe Bonner, an analyst at Argus Research Co., who rates the shares a hold and doesn’t own them. “If you can’t sell ads to those people, you’ve got a problem.”

Photographer: Jason Alden/Bloomberg

The Facebook app login screen on an iPad, in this arranged photograph in London. Close

The Facebook app login screen on an iPad, in this arranged photograph in London.

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Photographer: Jason Alden/Bloomberg

The Facebook app login screen on an iPad, in this arranged photograph in London.

Facebook, which reports earnings today after U.S. markets close, is projected to have profit excluding certain costs of 11 cents a share. In last year’s third quarter, the company had $954 million in sales.

Beyond Desktops

Shares of the Menlo Park, California-based company gained less than 1 percent to $19.46 at 10:13 a.m. in New York. Facebook has lost more than $40 billion in market value since its May 17 IPO, when it sold shares at $38 apiece, or 107 times trailing 12-month earnings -- a price that made it more expensive than 99 percent of all Standard & Poor’s 500 Index companies at the time.

One of the executives leading the effort to move beyond its traditional desktop business is Jeff Kanter, who was named mobile-ad products manager about a month before the company rolled out its first such service in March. Kanter, who has been at Facebook for five years, said the company is working to strike a balance between pursuing the right mobile advertising and ensuring it doesn’t turn off users. The company has rolled out seven new mobile ad services this year, including those that let companies sponsor stories and promote postings in mobile News Feeds.

“We’re really focused on building the right products,” Kanter said. “We trying to find the right experience.”

Mobile Market

It’s a big challenge. In its first year in the running, Facebook is likely to rank only sixth in U.S. mobile advertising revenue for 2012, with just 2.8 percent of the market, according to EMarketer Inc. Google Inc., which is No. 1, is estimated to hold 55 percent, up from 52 percent in 2011.

Yet Facebook users are increasingly moving to mobile. About 60 percent of the company’s more than 1 billion users are accessing the service on mobile, compared with about 47 percent in the third quarter of last year. Ads that are popular on the desktop don’t easily translate to mobile devices, where the smaller screens make it trickier to push marketing efforts, and therefore are less lucrative, according to EMarketer.

“There’s always the question of real estate,” said Debra Aho Williamson, an analyst at EMarketer. “For every ad that Facebook is selling on mobile, it’s bringing in less money than it would, on average, on a desktop.”

Preferences, Connections

Still, the company aims to stand out with a different approach to mobile advertising, using data on user preferences and connections to improve marketing messages, Kanter said. Instead of just slapping on a banner ad that takes up 15 percent to 20 percent of the screen, Facebook wants to “insert a story” that includes an advertiser’s message straight into a user’s News Feed, which includes text and photos from friends.

“We’ve been really wondering how we can transform the ways that businesses and people connect,” he said. “We’ve always thought: How can the ad experience be additive -- where if we actually took this away, users would want it back?”

Not everyone is convinced. Advertisers that want to reach users to generally promote their brands prefer display ads that feature bigger graphics, said Karsten Weide, an analyst at IDC. At the same time, marketers that don’t mind simpler text ads designed for an immediate response -- like those Facebook’s mobile service offers -- don’t receive the same results they might get by advertising on Google’s search engine, he said.

Promoted Content

In March, Facebook rolled out Sponsored Stories as its inaugural mobile ad service, letting companies promote content that a user’s friends have signaled they “like” or interacted with in some way. The social network then added Promoted Posts, in which companies can highlight marketing messages to their fans and friends of fans.

Kanter has tried to promote mobile ads throughout the company, helping woo more interest from other Facebook teams. At a recent “hack” session, engineers came up with a new ad product that may be rolled out next year, he said.

“Facebook is a mobile-first company,” said Gokul Rajaram, head of ad products at Facebook. “We want every monetization product to be mobile first as much as possible.”

Fab.com, an online marketplace for high-end goods such as furniture, clothing and artwork, will more than double ad spending on Facebook this year to at least $20 million and plans to spend $1 million or more on mobile advertising, partly because of the social network’s new offerings, said Chief Executive Officer Jason Goldberg. The retailer, which tries to test early ad products, has found particular success with Facebook’s new service that encourages members to download promoted applications, based on user targeting developed on the desktop, he said.

Coming Back

“We’ve been kind of out in front in the innovation cycle of Facebook and try to help get it right,” Goldberg said. “We keep coming back to Facebook.”

Still, Fab.com has found less success with Sponsored Stories, where engagement is harder to measure, Goldberg said. Fab.com is working with Facebook to help improve its usefulness, he said.

While Kanter will continue to roll out new services to woo advertisers to mobile, he said he’s focused on making sure the messages don’t turn off members who were accustomed to ad-free feeds. As sales of phones and tablets outpace PCs and data networks get faster, the company’s success in making money from mobile users may depend on his ability to find that balance.

“In mobile you have to be more deliberate,” said Deb Liu, Facebook’s product manager for platform monetization, who worked with Kanter on the application-download ad project. “You have to make sure the advertising is actually well integrated into the product itself.”

To contact the reporter on this story: Brian Womack in San Francisco at bwomack1@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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