Yes, there's a tech bubble: Facebook's mobile ad success proves it

Despite gaudy numbers for Facebook’s mobile business, spending on mobile ads may not be sustainable.

facebook moble

Take a quick glance at the mobile ad world and you might think everything is hunky dory. Fueled by a big uptick in mobile ads, Facebook stock is testing all-time highs. Looks good, right?

But where’s all that money being spent on ads actually coming from?

Facebook has made no secret of the fact that much of its mobile revenue is coming from so called click-to-download ads for other mobile apps. These have been far and away the most effective and lucrative part of Facebook’s mobile ad business -- so much so that Google is working hard to emulate that success. (Note that Facebook took pains to downplay the dominance of these app install ads in its July earnings call, claiming that they don’t represent “all of the revenue or a great majority of revenue.” But company COO Sheryl Sandberg didn’t really offer more specifics beyond that.)

Click-to-download is great, but...

Click-to-download ads make a lot of sense; because the ads are being viewed on a mobile device, consumers can just click to download the app right to their phone. The user gets the app, the app gets a user, and Facebook gets paid. Everybody wins, right?

Well, sure, except here’s the dirty little secret -- the vast majority of those apps aren’t making any money off those new users they’re acquiring. They’re pretty much all trying desperately to achieve scale, and plan to worry how to monetize things later. That makes sense, too, because if those apps can’t acquire millions of users, then nothing else they do really matters. They’re dead, period.

The problem is that they can’t all succeed at attracting and keeping that kind of scale. And even among the ones that do, only a small percentage will figure out ways to monetize those users. Someday.

How long will investors keep funding the app makers?

In the meantime, where is all that money coming from? Venture funding, in most cases. Angels and venture capitalists and other investors have put up billions of dollars to create these companies in hopes of striking it rich. And one of the only possible ways to do that is to pour buckets of cash into mobile ads on services like Facebook.

As long as the investment money keeps flowing in, the app companies will keep spending a fortune on mobile ads, and Facebook will keep looking like a world beater. But that investment can’t last forever. At some point, these apps companies will have to begin earning enough money to pay for the ads that fund their user growth. (And that’s a whole different bubble…)

So the real issue isn’t how well Facebook is doing selling mobile ads right now; it’s how likely mobile app developers are going to be able create self-sustaining businesses. You could say one bubble is blowing up another one.

Most app makers aren’t making money

Despite continuing increases in the numbers of apps downloaded, the prognosis for monetization remains grim. According to a Network World story earlier this year, Gartner offered a litany of bad news:

  • 90% of paid applications are downloaded fewer than 500 times per day--and make less than $1,250 a day.
  • Increasing competition will only make things worse.
  • Users are demanding ever more sophisticated apps, increasing costs across the board.
  • By 2018, only 1 in 10,000 consumer apps will be considered a financial success by their developers.

Unless those apps ads can be replaced, or at least significantly augmented by ads for products that actually make money, this whole business is a house of cards propped by a stream of outside money that can’t last forever.

Unfortunately, other types of mobile ads – those for products people will actually pay for -- are still struggling on the mobile platforms. At its own earnings call last month, “Google admitted it has some problems monetizing its services on smaller screens, at least for now.” Until those problems are solved, and Facebook, Google, and their competitors figure out to sell cars and food and toothbrushes on mobile devices, it’s hard to see how the mobile ad boom is sustainable.

Want more evidence of the tech bubble, see my earlier post: Yes, there’s a tech bubble: Google Shopping Express proves it

Join the Network World communities on Facebook and LinkedIn to comment on topics that are top of mind.

Copyright © 2014 IDG Communications, Inc.