Facebook's mobile ad revenue stream—at a run rate of $180 million a year—was the big news out of the company's Q2 2012 earnings call, but less attention has been paid to a piece of the company that many expect to become a far larger part of Facebook's ad revenues: The Facebook Exchange, or FBX as COO Sheryl Sandberg calls it.
Here's Facebook's problem: $180 million is a lot of money, and that sum is expected to grow. But Facebook's annual revenues will likely be greater than $4 billion, so in the larger scheme of things mobile is actually going to be a small piece of Facebook's overall business.
That's a huge problem for a company where more than half of users are now accessing the platform on mobile.
Plus, its user growth is flattening.
So where will the significant revenue growth come from?
Mobile ads not cutting it
Even if Facebook's mobile ad business grows, its growth will likely be restricted by users' tolerance for messages that interfere with the mobile experience, according to Lars Albright, CEO of mobile ad shop SessionM (and former co-founder of Apple's Quattro Wireless acquisition). He told us recently:
Facebook is the most used app on every mobile platform, which means there’s incredible opportunity for growth here. But one of the biggest challenges for Facebook is how to create the right user experience and integrate it effectively into their flow of content. They can’t just take an online strategy and assume it will work, like slapping a banner ad across the top of the screen.
The likely solution to all this is FBX, according to Jordan Bitterman, svp at Digitas. Facebook Exchange, or FBX, was mentioned twice on the call by Sandberg. She said:
In Q2, we also began testing another new ad product. The Facebook Ad Exchange, or FBX, allows marketers to bid in real-time for ad impressions on Facebook. Real-time bidding is a standard industry practice to help advertisers reach the right customer at the right time, and it will help us deliver more relevant ads to users. We're in an early-offer test with FBX, but advertiser interest is strong. eMarketer estimates this market to be approximately $2 billion in the U.S. alone.
Two billion dollars! Yet analysts only asked about it once.
How FBX works
The issue here is that everyone understands mobile advertising—the ads are right there, on your phone—but few understand how FBX works. It's a bit like Google's AdSense program. If you are a Facebook user, Facebook will drop a tracking "cookie" on your device. That cookie will give advertisers a specific anonymized ID. If you return to Facebook after being on a shopping site, but you didn't buy anything, you may start seeing ads on Facebook reminding you that those items are still available. The cookies will also trigger ads on Zynga. The exchange hasn't yet been rolled out to other third-party sites, but that could happen.*
The exchange could be massive. Any website in the world could become a part of it, and any advertiser could utilize its data. And that data—"plumbing based on social graph data," as Bitterman calls it—says more about you personally than any other single site. It's incredibly valuable.
If mobile will be too small in the near term, and user growth won't add much either, then Facebook needs to get new money from somewhere else. FBX, in fact, could solve Facebook's growth problem.
"They're going to have to monetize off the platform," Bitterman says. "That's where the Facebook ad exchange comes in."
At this point, Bitterman believes, it will be very difficult for Facebook to raise its ad prices on its own inventory. So, "FBX is the biggest opportunity in the short term ... that's huge."
*Correction: This item originally described incorrectly how FBX works. Apologies.
Disclosure: The author owns 30 shares of Facebook stock.
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