Those Facebook results

Facebook's mobile ad revenues surprised everyone the other day, jumping 75% in three months. Facebook shares soared 30% as analysts were startled by "thesis-changing" results:

"The revenue beat is huge," said Michael Pachter, a Wedbush Securities analyst. "They are clearly doing a great job with local ad sales."

Now I've been using Facebook mobile app most days, and I was astonished by the results. I would characterise the FB mobile adverts as intrusive (taking up chunks of the stream), and not at all relevant as far as I can see (I wasn't even vaguely interested in their subjects). I'd also note that their hotspot - the area of the screen where tapping takes you to the advert's link - is huge. Based on those observations, I have a theory about the FB results.

For a while now, online advertisement firms haven't been able to get much money from showing ads. They have to persuade users to follow the ad (by clicking) so that the advertiser sees traffic to their site from that advert. If the online advertiser can supply demographic detail on the clicking-through user to their advertising client, so much the better. So clicks are a reasonably good proxy for revenue. It's even better if you can trace the click through to an actual sale, but that can be a problem - it's hard to have a good purchasing experience in mobile, for instance, so you might expect the user to actually buy things from their desktop instead once the ad has whetted their appetite.

What I think Facebook has done, very successfully, is to make most of their (hundreds of millions of) active mobile users click on adverts in the stream. Most of these clicks have been accidental. But agents working for advertisers have their campaign success measured by clicks, at least in the short-to-medium term. Therefore they are happy to advertise with Facebook, get all the clicks and hence hit their sales targets, and trouser the appropriate bonus. This works against their long term interests, unless they can get themselves hired away to another firm based on their sales success. It certainly works against the interest of their employing firm - a classic principal-agent situation.

If I'm right - and this is just an educated guess, so I could be massively wrong - in 1-2 more quarters advertisers will be able to see that the surge in mobile clicks does not translate into, say, actual purchases traceable back to the adverts. At that point the value of a Facebook mobile click will become more apparent, and mobile ad revenue will plummet. Facebook has bought itself 3-6 months to tune their advert selection algorithms to make it more likely for users to purchase items - and, preferably, allow advertisers to track the ad click through to a purchase.

If you really want advert clicks to translate into money, you need to make it as hard as possible for a user to accidentally click an advert. The easier you make accidental clicks, the clearer it is that your motivation is to get clicks rather than purchases ("conversions"). And in the end, if the user doesn't purchase something, the advertiser has wasted their money.