Facebook Ads Becoming (A Little) More Valuable; Mobile May Be Next

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In the S-1 filing for Facebook’s IPO, the company offers a little more insight into its advertising business, which it describes as “the substantial majority” of its revenue (and that’s an understatement).

In 2009, advertising accounted for 98 percent of Facebook’s revenue. The number declined to 95 percent in 2010 and 85 percent last year, thanks largely to the growth of revenue from payments. Advertising revenue is climbing, though that growth has slowed  — it grew 69 percent in 2011, to $3.2 billion, but it grew 145 percent in 2010. (As one point of comparison, our corporate masters at AOL reported $1.3 billion in ad revenue last year.)

What’s driving the growth? Facebook’s increasing traffic, which led to a 42 percent increase in ads served. Plus, the company says that the average price advertisers pay per ad increased by 18 percent, thanks to improved ad targeting capabilities and more prominent ad placements. Another factor: Facebook increased the minimum bid price for an ad,
“to reduce the frequency with which low quality ads are displayed to users.”  (Hat tip to Inside Facebook for catching that last bit.)

As evidence of the effectiveness of  its socially driven ad strategy, the filing points to a Nielsen study, which found that Facebook ads wrapped in social data (i.e., including “Friend X liked Brand Y” above an ad) did 50 percent better in ad recall than Facebook ads without that data.The filing also highlights some of Facebook’s advertising success stories, and it talks about the advertising ad spend from specific companies —  namely, the ones whose executives are also on Facebook’s board. The Washington Post company spent $4.2 million on Facebook ads in 2011. Netflix spent $3.8 million.

There is, however, one big gap in Facebook’s monetization strategy. Despite the fact that mobile makes up about half of Facebook’s traffic, the company doesn’t currently serve ads in its smartphone apps, something the filing brings up multiple times. However, Facebook says, “We believe that we may have potential future monetization opportunities such as the inclusion of sponsored stories in users’ mobile News Feeds.”