Six months ago, Facebook Inc. seemed to have no mobile strategy to speak of, and no way to justify its lofty valuation to skeptical investors. That seems to have changed, as its share price jumped more than 20 per cent on Wednesday, following the news that it is now generating 14 per cent of revenue from mobile.
So what did the world's biggest social network do, in just half a year, to change its business and change Wall Street's mind?
1: Mobile apps Facebook CEO Mark Zuckerberg made a point this week of mentioning the rapid growth of Facebook's most high-profile acquisition, Instagram. When Facebook first announced its $1-billion bid for the photo-sharing service in April, Instagram's user base hovered around the 30 million mark. Today, it has 100 million users.
Buying one of the world's most popular mobile apps is one of several measures Facebook has taken to strengthen its app arsenal. The company has also revamped its iPhone app to make it faster and to improve the user experience (a redesigned app for Android-powered phones is due out soon). So far, those efforts are proving fruitful, as users who visit Facebook using mobile devices tend to be more engaged with the site than those who visit from their desktop computers.
2: Less reliance on gaming When Facebook first made public its regulatory filing ahead of its initial public offering earlier this year, it disclosed that a whopping 12 per cent of its revenue came from a single source – the online game company Zynga.
Since that time, however, Zynga has slowly imploded. The company's games, once hugely popular with Facebook users, aren't attracting the attention they once did, and the company's share price has lost almost 80 per cent of its value in the past year.
As a result, the percentage of revenue Facebook derives from its game partners is shrinking. Even though other Facebook game partners have been doing well, the mess that Zynga is in will make investors glad the social network is relying more on ad revenue and less on a social games business that is, at best, extremely volatile.
3: Ads made for mobile When Facebook went public, it was selling mobile ads, but marketers could only purchase them as part of a larger online buy. That got in the way of the kind of targeting advertisers value. "If your brand is targeted to a younger generation, they're on mobile … it doesn't make sense for you to be advertising on desktop and mobile," said Terri McBay, executive director of social media at Ogilvy One in Toronto.
Those mobile ads have become much easier to target in the past six months since Facebook opened up its API – the building blocks of an operating system – to marketers. That means the process of uploading a number of variations on an ad based on a user's location, gender and other specifications has become much less labour intensive, said Paul Crowe, partner at Toronto-based Bnotions, which builds apps and other mobile marketing tools for clients. "The steps they've taken have made it easier for companies to not only understand the ad options, but actually take advantage of them," he said.
4: Marketing content Part of the growth is also drawn from the increase in "Sponsored stories" for mobile, the kind of ads that pop up in a user's news feed based on the brands their friends have liked. Unlike other mobile products, which try to adapt banner ads for a mobile screen where they don't really fit, the stories are more naturally integrated into the news feed, and therefore appear as part of the mobile experience.
In a research note on Thursday, Morgan Stanley analysts pointed to the growth of revenue from mobile-sponsored stories as a positive sign that "mobile will likely be an even larger contributor to ad revenue" next quarter.
"Previously with mobile, it was the tiny little sliver of stuff at the bottom, and that was the ad. You'd get slip-of-a-finger clicks. In Facebook, because it looks like a piece of content, and acts like a piece of content, you're more likely to click on it," said Ed Lee, director of social media at ad agency TribalDDB Canada.
The challenge for Facebook in coming years, he said, will be preserving the friend-interaction experience as branded content integrates more and more into the stories users scroll through when they log in.