Facebook offers a four-pronged approach to advertising: it delivers to advertisers reach, relevance, social context, and engagement. The majority of Facebook’s revenue is derived from its advertising products; this trend continued in the second quarter 2012.
Facebook generates revenue primarily from advertising products on its desktop website. It leverages its 955 million monthly active users, and allows advertisers to target its user base by age, location, gender, or interests, which are shown either directly or through relationships with advertising agencies. Costs are measured by impressions delivered or the number of clicks by users.
In the second quarter 2012, Facebook reported $922 million in revenue. This represents 84% of Facebook’s total revenue for the quarter, and a 28% increase from the second quarter 2011.1 While Facebook’s revenue is down slightly from the September 2011 quarter, it is perhaps too early to predict advertising revenue growth.
Although Facebook’s advertising revenue increased compared with the previous quarter, Facebook’s dependency on advertising revenue seems to be trending downward only slightly. And, as I discussed earlier – unfortunately – Facebook’s payments business (its second largest revenue source) appears to be stagnating. This means that Facebook’s advertising business continues to be a dependency that could prove to be a liability for the company.
Facebook has seen sizable growth from new ad products like Sponsored Stories, both on desktop and mobile. According to CEO Mark Zuckerberg, Sponsored Stores is now generating $1 million per day, with half of revenue coming from mobile.2 This is notable, since Facebook has been reluctant to push advertising to its mobile platform.
Facebook noted in its earnings report that its own independent ROI data, collected from over 60 ad campaigns on the platform, show that 70% of campaigns resulted in a 3 times or better return on ad spend. The company also highlighted that 49% of campaigns showed a 5 times return on ad spend or better.
COO Sheryl Sandberg noted that Facebook is also alpha testing a real time bidding ad format, which allows for more specific ad targeting (and ideally would drive higher ROI). The company also revealed that less than 50% of its ads are social, and that Sponsored Stories represents a very small portion of its advertising product mix.