Assessing Facebook’s Advertising Business

As we have come to expect, advertising continues to comprise the majority of Facebook’s revenue. According to the company’s 10-Q filing, advertising accounted for about 86% of Facebook’s revenue in the quarter. Its filings also continue to illustrate the extent to which seasonality affects the company’s advertising revenue. We can also observed the effect of Facebook’s mobile monetization effort, which resulted in about 43% revenue growth over the year ago quarter.1

Facebook generates its advertising revenue from delivery of click-based advertisements on its website and mobile products. According to its 10-Q filing, Facebook’s advertising revenue increased from $872 million in Q1 2012 to $1.245 billion in Q1 2013, a 43% increase in revenue. As the company notes, this was due to a 39% increase in the number of ads delivered to users, and a 3% increase in the average price per ad paid by advertisers over the year ago quarter.

Facebook's quarterly advertising revenue

We can attribute these increases in ads delivered and price paid per ad primarily to the introduction of News Feed advertisements on Facebook’s desktop product, and later on its mobile products. Concurrently, increases in monthly and daily user engagement allowed the company to deliver more ads to users in the quarter. Finally, Facebook’s decision to lower the market reserve price increased the number of click-based advertisements hired on the network.

Continue reading…