Market Insight

More ads good for short-term, but quality of ads will drive future Facebook growth

October 25, 2012

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Facebook reported revenue growth of 32.3 per cent year-on-year (yoy) in Q3 2012, reaching global revenues of $1.26bn. Revenues from advertising amounted to $1.09bn, increasing 36.1 per cent yoy. They constituted the majority of Facebook's earnings at a 86.1 per cent share, up from 83.6 per cent in Q3 2011 and 83.7 per cent in Q2 2012. For the first time, the company stated that 14 per cent of its advertising revenue was from mobile, amounting to $152m in Q3 2012.

Monthly active users (MAUs) grew double-digit at 25.9 per cent, reaching just over 1bn for the first time. 60.0 per cent of MAUs (or 584m users) accessed Facebook on their mobile and 12.5 per cent (or 126m users) accessed Facebook solely through mobile up from 102m in Q2 2012. The company's daily active user base (DAUs) also grew from 457m in Q3 2011 to 584m in Q3 2012.

Regional revenue continues to be skewed towards North America, with the US and Canada generating $637m this quarter, just over half of total revenue. The US and Canada were followed by Europe at 27.1 per cent of total revenue and Asia at 12.2 per cent. The Rest of the World contributed to 11.0 per cent of total revenues, despite having the top share of total MAUs at 28.6 per cent.

Facebook presented a clearer, more comprehensive and cohesive picture of its business plan this quarter. Advertising is driving revenue growth and has become the central focus of the company, making up 86.1 per cent of total revenue this quarter. Internally, all teams are now in charge of advertising in their new products, incentivizing them to develop products in which ads are part of rather than a disruption to the user experience. This is reflected in the continued increase in advertising revenue which is driven both by the increase in the number of ads delivered (up 27 per cent year-on-year), but also by the increase in the price of ads (up 7 per cent year-on-year). The increase in price per ad is due to the ramping up of ads in the newsfeeds, which are more engaging and hence recognized by advertisers as more effective.

Adding more advertisements to Facebook will increase revenues in the short-term, however if not executed carefully, it may impede on the user experience and decrease the advertising potential of the Facebook product.

However, even though Facebook has managed to increase the value of its advertising business, it has not done so equally across regions. The overall growth in the price of ads was heavily skewed by the North American market where the price per ad increased 20 per cent, implying that other regions are lagging behind. As the American user base plateaus, increasing by only 13m users year-on-year versus a global growth of new users of 207m, Facebook will have to demonstrate the value of its product abroad as that is where growth opportunities will lie.

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