Facebook’s Biggest Weakness — Mobile Ads

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The best news to come from the most recent Facebook Inc. (FB) earnings report rests on its successful move into mobile advertising. Large audiences of virtually all major sites have moved from the PC to tablets and smartphones. The logic stands that these businesses cannot make money unless marketing dollars travel with the audiences. The weakness of the case is that advertisers pay less for messages put on phones than those placed on larger PC screens. To gain success, ironically, Facebook has moved down the road to lower ad rates and margins.

Google Inc. (GOOG) posted earnings that pointed to the mobile problem. In SEC filings, the search giant has readily admitted the challenge. While on the surface Google's dominant position in mobile advertising seems a blessing, it is a mixed one at best.

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Research firm eMarketer has forecast that Google should have more than half of the mobile ad revenue in the United States this year. Facebook's share will be less than 15%. Wall Street worries that Google may have won a battle that is barely worth winning. Because of the core value of search to all people online, Google's audience will seek it out anywhere, but not all "anywhere" is created equal.

The latest quarter was a blowout one for Facebook, for certain:

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Revenue for the second quarter of 2013 totaled $1.81 billion, an increase of 53%, compared with $1.18 billion in the second quarter of 2012. Mobile advertising revenue represented approximately 41% of advertising revenue for the second quarter of 2013. For the second quarter of 2013, GAAP net income was $333 million, compared to a net loss of $157 million for the second quarter of 2012.

Experts who follow online advertising have been aware of the mobile ad rate problem for some time. Editors at Mashable reported late last year that:

Earlier this year, the renowned venture capitalist and former Wall Street analyst Mary Meeker gave her much-watched annual presentation on Internet trends, during which she revealed a startling statistic based on her own research: The effective cost per thousand impressions (CPM) for desktop web ads is about $3.50, while the CPM for mobile ads is just $0.75.

Facebook's share of all display advertising in the United States has been put at more than 25%. It does not have anywhere near that share of dollars. So, the social network already has a challenge with advertisers who do not think it is worth paying a premium to reach the Facebook users.

There is bound to be some euphoria as the volume of mobile advertising swells, because the mobile audience for almost all media as burgeoned so quickly. But shortly that will be followed by the realization that the transformation is not quite as good as its seemed.

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Facebook and Google are no alone. It has been widely believed that the reason that advertising revenue at large portals and news sites had flattened, or even begun to fall, as these properties gain more mobile viewers is that marketers see less value in all media that has moved off the PC.

Facebook used to have a mobile problem, which was that it did not have enough online revenue based on where its audience used the service. Now, it has too much.

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