Facebook says mobile ads successful, but analysts say challenges remain

The company's mobile advertising is not a long-term solution to monetize mobile users, some analysts say

Facebook seemed to answer at least one burning question about its mobile business on Thursday -- it doesn't plan to build its own smartphone -- but it's still not entirely clear how it will capitalize on its rapidly expanding base of mobile users.

"Building out a whole phone wouldn't really make much sense for us to do," said CEO Mark Zuckerberg on Thursday, when asked about Facebook's mobile strategy during a conference call to discuss its first financial report as a public company.

The number of people who access Facebook's service from mobile devices is expanding rapidly. The company had 955 million monthly active users at the end of June, of which 543 million accessed Facebook from a mobile device, the company said Thursday. That was up 67 percent from the same quarter last year, it said.

But Facebook continues to face a problem it laid out in its pre-IPO filings: It makes less money when users access its service from a mobile device than from the desktop. That fact contributed to the poor performance of Facebook's initial public offering.

On Thursday, Facebook said that its user base grew more quickly last quarter than the number of ads it serves, as users spend more time on its service using a mobile device. That reflects the fact that Facebook displays fewer ads to mobile users.

But Facebook pointed to early indications that the ads it introduced to mobile users in June will boost its mobile revenue. Its early analytics suggest that Sponsored Stories on mobile devices are performing relatively well, Facebook said. By the end of June, Sponsored Stories were generating around US$1 million per day, it said, with about half on mobile devices.

Sponsored Stories appear in the user's news feed. If one or more of a user's friends has "liked" a particular brand, the user sees an item about that action in his news feed. The ads receive more prominent positioning in the news feed than other content, advertisers and analysts said.

Third-party studies have also indicated that the mobile ads have been successful. A report released on Tuesday by AdParlor, a firm that runs Facebook marketing campaigns, said Sponsored Stories actually perform better on mobile than they do on the desktop.

Users were 11 times more likely to click on a Sponsored Story on their mobile device than one on their desktop, the study found. However, those who clicked were 20 percent less likely to "like" the promoted brand. Mobile sponsored stories are still a buyer's market, with advertisers paying less per click than on desktop, according to the study.

But analysts suggested Facebook has more work to do to tackle its mobile problem.

Facebook won't be able to bet on Sponsored Stories as its main mobile advertising offering for long, said analysts interviewed before the company's earnings were released. With the mobile advertising market likely poised to enter a period of dramatic innovation, the company will have to invest in improvements to its mobile platform that keep users engaged and enable more sophisticated forms of marketing, the analysts said.

"I think Facebook is going to have to find a different way to monetize mobile that isn't about little display ads," said Melissa Parrish, an analyst at Forrester Research, referring to Sponsored Stories.

Chris Silva, of Altimeter Group, called Sponsored Stories "blunt instruments."

"Facebook is leading now for lack of anybody coming along and innovating," he said.

Facebook will likely need to undertake substantial improvements to its mobile platform, analysts said. It has yet to introduce location-specific advertising, they noted. And it will need to support on its mobile platform interactive "rich media" advertising, which advertising insiders say appears to be most effective for marketers. Facebook will also need to make better use of its user data to target ads to users who are most likely to be interested in what they promote, the analysts said.

Cameron Scott covers search, web services and privacy for The IDG News Service. Follow Cameron on Twitter at CScott_IDG.

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