Original URL: http://www.theregister.co.uk/2014/04/28/facebook_readies_ad_network_prepares_location_based_assault/

Facebook preps ad network to TARGET YOU WHERE YOU LIVE

Location-based assault is go...

By Faultline

Posted in Applications, 28th April 2014 08:04 GMT

Competition for mobile advertising dollars is set to intensify as Facebook joins Google, Apple and Twitter by launching a mobile ad network that generates revenue when users access apps outside its domain.

At the same time Facebook is also planning to expand into location-based mobile advertising after preparing the ground with the launch of a feature called "Nearby Friends," allowing its users to share their location with a selected group of friends. Facebook has indicated that this will support location based advertising on an opt-in basis.

With these two moves, Facebook is addressing two of the principal mobile ad sectors: location and in-app ads. This comes at a time when the mobile advertising market as a whole is growing much faster than fixed internet, with the main players scrambling to establish market shares before the field approaches saturation.

World mobile ad sales soared by 105 per cent from $8.7bn in 2012 to $17.9bn last year, according to a study published in March by eMarketer, with a prediction that it would put on a further 75 per cent during 2014 to scale $31.45bn.

Playing catch-up

Google had already established a strong position by building out from fixed online advertising, having taken over mobile ad platform AdMob, already popular on the iPhone, for $750m in November 2009.

Google took half the fledgling mobile ad market on the back of AdMob and was still at that mark on 49.3 per cent in 2012, but is only now facing a full-on assault from Facebook, alongside Apple, while Twitter is just getting going. Facebook had just 5.4 per cent of the global mobile ad market in 2012, but increased this to 17.5 per cent share in 2013, so that its actual mobile ad revenues were up seven times to $3.09bn.

Facebook will struggle to increase its share significantly further but it is still on the rise according to eMarketeer and on course to reach 21.7 per cent by the end of the year. Facebook’s advance is now drawing blood from Google, whose share will sag a little to 46.8 per cent this year and the question will then be whether Facebook, Twitter and other contenders make further inroads.

The stakes are high for all parties as mobile accounts for a rapidly increasing proportion of revenue. In 2012, only 11 per cent of Facebook’s net ad revenues worldwide came from mobile, but this leapt to 45.1 per cent in 2013 and is on track to reach 63.4 per cent in 2014. The proportion is growing just as fast for Google, with mobile accounting for 23.1 per cent of its net ad revenues in 2013 and estimated to be 33.8 per cent by the end of 2014.

Facebook’s prospects of eating further into Google’s mobile ad share hinge on the success of its twin attack on location and mobile ad networking. For the latter Apple is already there with its iAd mobile platform, while Twitter entered the fray with its $350m stock purchase of mobile advertising network MoPub in September 2013. Founded in 2010, MoPub manages and optimises ads for mobile applications and runs its own real-time biding exchange, claiming to serve more than 1 billion ads per day to app users on iOS and Android devices.

Facebook has been under growing pressure to emulate these competitors and plug this gap in its ad portfolio by launching its own mobile ad network, which it is now on the verge of doing at its F8 Developer conference this week on 30 April 30 in San Francisco.

Although this launch has not been formally confirmed, it is no secret Facebook has a mobile ad network under wraps, following the announcement in January 2014 that it was starting tests placing ads in third-party mobile applications with a small number of unnamed advertisers and publishers.

'Liked' by advertisers

This involved a mobile network approach without using an external ad-serving platform. The idea of a mobile ad network is to combine ad-serving technology with knowledge about users’ preferences and tastes, in this case derived potentially from Face-book’s global 1 billion subscriber base. This can then be used to create target groups from the Facebook user base, which in principle could range in size from individuals to hundreds of millions.

The key benefit of a mobile network is that it allows Facebook to generate revenue from its users even when they are outside its domain, typically when inside apps. Facebook’s appeal to advertisers lies in the size of its subscriber base, combined with the already proven ability to target with reasonable accuracy on the basis of known likes and comments, as well as exploiting the tendency for users to share relevant ads with their friends, extending the reach further.

Facebook believes this will be powerful when combined with known preferences, both by avoiding annoying users with irrelevant ads and also alerting people to services or outlets they are genuinely interested in. To conform with privacy concerns and regulations Facebook will offer location based advertising, as well as the Nearby Friends feature itself, on an opt-in basis, but hopes that the precision will entice many users to do so.

Amid the hype and excitement over advertising, it is worth recognising that this is only part of the mobile monetisation strategy for Facebook, Google, Apple and the other major players, alongside subscription. One reason is that there is a substantial constituency averse to receiving ads, particularly for certain types of services.

For this reason, Google’s paid YouTube channels include some that do not show ads and also offers the option of paying for some of the free channels in return for avoiding ads, although admittedly it is not clear what take up the latter have had.

For Facebook advertising has been seen as the predominant source of revenue from the outset, with a strategy of gaining critical social mass by being free to subscribers. But this strategy has had to be revised in the wake of Facebook’s one crucial mistake, its failure to spot the rise of international messaging making use of the mobile Internet to undercut and circumvent SMS texting.

Carriers were also slow to spot this trend, causing them to lose $32.5bn collectively in texting fees in 2013, according to Ovum.

As so often happens, it took a startup, WhatsApp, to seize this opportunity and it grew rapidly to gain a 450 million subscriber base by the end of 2013, with forecasts that it would reach a billion to rival Facebook’s own base within a further year to 18 months.

Facebook was too late to respond organically and Mark Zuckerberg felt he had no choice but to acquire the company if Facebook was to become a leader in mobile social media and communications, despite having no clear monetisation strategy for WhatsApp and being forced to pay the seemingly extortionate fee of $16bn plus $3bn new stock.

What's up with Whatsapp?

WhatsApp was virtually unheard of in the US until the Facebook purchase announced in February 2014, and still to be finally cleared, largely because texting had long been free there in a large domestic market with relatively low levels of international traffic. But it had been gaining popularity rapidly in Europe and even more so in key developing markets including Brazil, India, Mexico and Russia, which meant Facebook’s move ensured it became a major player in mobile messaging and social media as a whole there.

But the WhatsApp acquisition has proved disruptive to Facebook’s monetization strategy, given the anti-advertising philosophy espoused particularly by its founders Jan Koum and Brian Acton. “Advertising has us chasing cars and clothes, working jobs we hate so we can buy shit we don't need," Koum tweeted in August 2011, directly quoting Tyler Durden, the main character from the movie Fight Club.

The founders have repeatedly emphasised that WhatsApp is founded on privacy and the idea of knowing as little as possible about its customers, and reiterated this after the Facebook take-over with the message:

You don’t have to give us your name and we don’t ask for your email address. We don’t know your birthday. We don’t know your home address. We don’t know where you work. We don’t know your likes, what you search for on the internet or collect your GPS location. None of that data has ever been collected and stored by WhatsApp, and we really have no plans to change that.

The trouble is that the rest of Facebook trades on such information, albeit supposedly anonymised. The whole ethos is based on shared information, so that at present WhatsApp sits somewhat uncomfortably at the edge as an autonomous company, appearing to have been purchased partly to ensure that it would not expand to become a major challenger across the whole social media space, particularly in emerging nations.

WhatsApp is continuing with its subscription model, but it is free for the first year and only $0.99 per annum thereafter, so its initial return on investment for Facebook will be poor. The consolation is that WhatsApp’s stance over privacy looks increasingly in tune with use sentiment in the post Snowden era and its competitive benefit may outweigh the lack of immediate revenue prospects, especially in key markets outside the US.

Meanwhile Facebook has been doing well ever since the damp squib of its IPO in May 2012, which was the biggest ever high tech flotation in raw cash terms with its peak capitalization of $104bn, but was followed by a shares slide.

The stock did not regain its IPO value of $38 for over a year, finally reaching the mark in June 2013, but since then it has outperformed the internet stock average, reaching $62.71.

What about Wall St?

Ironically it was concerns over Facebook’s ability to migrate its ad business to mobile as quickly as its user base was moving, which was cited as a reason for the IPO debacle. Since then the accelerating rise in mobile ad revenue has helped the stock first recover and then thrive, with even the WhatsApp acquisition only provoking a temporary 3.4 per cent share slump before a recovery as investors decided that this was a lesser evil than not buying the company.

Facebook has also successfully brushed off the perennial predictions of imminent decline as it loses credibility with younger users. Comparisons with early social media incarnations such as MySpace and Friends Reunited have always been flawed because they peaked too early at a time when the social media market was immature and fluid, with little inertia to stop users churning.

Facebook now has the critical mass that these early fledgling sites lacked and the evidence so far is that it is successfully holding its position as the home base for social media even if users are also dabbling with other cooler outlets. The WhatsApp experience shows that Facebook must be vigilant to anticipate significant emerging sources of competition or even effective churn, with video messaging and advertising being a case in point.

Its $1bn purchase of photo and video app company Instagram in April 2013 was Facebook’s first clear move into multimedia sharing, picking up a user base that has continued to increase to reach 200 million this month. As with WhatsApp, Facebook is keeping Instagram at a distance, keen for the company to retain its distinctive appeal, based almost on a nostalgic return to square shaped images redolent of the old Kodak Instamatic or Polaroid images, rather than the 16:9 aspect ratio of most mobile phone cameras. But Instagram also enables recording and sharing of short videos up to 15 seconds long, playing a key role in Facebook’s expansion on this front.

Since the Instagram acquisition, Facebook has introduced video advertising within its mobile apps, although initially confined just to ads for other apps rather than opening it up to the whole ad market. This is part of Facebook's Mobile App Ads for Installs scheme, which enables developers to drive people to their apps on Apple's App Store or Android's Google Play store from within Facebook.

As a result, ads have figured increasingly in Facebook mobile news feeds, particularly for free-to-play games, as an alternative discovery channel to Apple and Google's app stores. But in this case the videos do not start playing automatically when they emerge in a user's mobile news feed, as Facebook is anxious to avoid provoking a backlash from users over intrusiveness.

Despite WhatsApp being left out of the party, Facebook looks set to corner one-quarter of the overall mobile advertising market to stand as a clear number two to Google.

Copyright © 2014, Faultline

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