Facebook shows the money to be made in mobile ads

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Chris Umiastowski is the growth investor for Globe Investor's Strategy Lab. Follow his contributions here and view his model portfolio here.

Is there money to be made in advertising on mobile devices? Of course there is. But exactly how much has been a hotly debated topic. Two of the largest companies in the Internet advertising landscape are Google and Facebook. Today, most of their revenue is derived from desktop and laptop users. Perhaps more specifically, the revenue comes from advertisers who are choosing to target their ads to desktop users.

But things are changing, and changing fast. In the last couple of weeks we've seen Google and Facebook announce their latest quarterly results. If you are paying attention, it is impossible to ignore the fact that both companies are seeing success in monetizing mobile traffic.

I already mentioned Google in last week's column. They're now on a path to generate $8-billion (U.S.) per year in mobile revenue. One year ago they were only on track to do $2.5-billion annually. So mobile revenue has effectively tripled in one year. This puts Google's mobile revenue at 17 per cent of its total (excluding Motorola Mobility, which it recently acquired).

And Facebook? They just released Q3 earnings last week, and held their second-ever quarterly conference call. To say they opened people's eyes with respect to progress in mobile advertising would be like saying Hurricane Sandy is bringing some mild precipitation to the East coast this week.

Six months ago, Facebook hadn't even started trying to monetize its mobile traffic. There was no revenue coming from iPhone, Android and BlackBerry users who connected to the social network on their phones. But in the September quarter 14 per cent of ad revenue came from mobile. That's an annual pace of over $600-million and quite a big deal. It makes Facebook the second largest mobile advertising company on the planet, behind Google.

But the story doesn't end there. Facebook's CFO disclosed enough information for analysts to calculate that, as of today, the annual run rate in the mobile business is about a billion dollars.

So let's recap: A short while ago, investors worried that mobile advertising wouldn't be very profitable. But now we've seen Google triple its mobile business in the last year, and we've seen Facebook go from zero to the number 2 in the world in only 6 months.

Now think about the next 10 years. We're seeing a massive movement towards mobile computing. Mobile devices are location aware, so ads can be even more targeted than in the past. New advertising vehicles will be created to effectively monetize mobile traffic, driving more ad dollars to the segment. A study by IDC shows that the worldwide total advertising market was about $588-billion in 2010. That includes all types of advertising, not just Internet ads. So how much of that comes from mobile devices? According to a more recent 2011 study by research firm IAB, it's less than 1 per cent.

There is a disconnect here, in my opinion. We're becoming more and more addicted to our mobile devices. We spend a lot of time looking at or listening to media, reading articles and watching videos. I bet the percentage of eyeball time on mobile devices is significantly higher than 1 per cent. And I think it's still increasing. This is bound to lead advertisers to the conclusion that more ad dollars should be invested in the mobile arena. This has to be good for the two biggest stocks in the business.

In my Strategy Lab portfolio I own Google, but not Facebook. The same is true in real life. So should I invest in Facebook too? They've got over a billion average monthly users. 60 per cent of those users are on mobile devices. Google bought YouTube and only started to monetize videos recently. Facebook bought Instagram, the popular mobile photo sharing service that has amassed over 100 million users so far. I have no doubt they will successfully monetize this in the coming months and years. Considering how much easier it is to upload photos from a mobile device (compared to videos), this might translate into a huge advertising opportunity for Facebook.

Next week I'll take a closer look at Facebook versus Google.