Has Facebook at last found a way to make money?

Mobile advertising finally gives investors something to like

It was at once one of the most eagerly anticipated stock market listings in recent years and the most disappointing: when Facebook decided to make the leap from Silicon Valley to Wall Street, investors began queuing up immediately for a slice of the social networking company, but when it pitched its shares too high, the stock cratered.

The post-mortem made for an embarrassing 2012 for a business that had enjoyed an astonishing rise, emerging from a university dorm room to become a technology behemoth in less than a decade, reigning over the social web from a base in Menlo Park, near San Francisco. Only this week, more than a year after the the stock floated and then promptly disappeared under water, did the price rise back to $38, the level at which it was initially sold to investors. The reason: Facebook's success at harnessing our growing fondness for mobile devices to generate advertising revenues.

Last year, in its second-quarter earnings release, the company didn't even bother to mention how much it made from mobile advertising, so nascent were its efforts in the new market. This year, the only thing anyone can talk about after the recent second-quarter results – and the thing that drove up the share price – was the announcement that more than 40 per cent of the company's advertising revenues over the period came from mobile.

The update helped cement a change in sentiment towards the company.

In the months after the listing in May 2012, Mark Zuckerberg's advisers were blamed for not only increasing the number of shares sold in the days ahead of the initial public offering but also the price, asking for up to $38 from an earlier upper limit of $35.

Soon, however, things got worse: the focus shifted from the too-high offer price to mobile revenues, which were too low. The market for mobile devices, meanwhile, continued to grow. Just this week, new figures data firm eMarketer show that in the US in 2013, adults are expected to spend more time consuming digital media on their mobile devices than on their laptops or PCs.

Facebook only began showing that it could exploit this growth during the latter half of last year. But, although at the time it appeared to be moving too slow for some in the stock market, its strategy ultimately proved to be a winning one: by allowing advertisements in news feeds and by giving developers the opportunity to push their apps inside Facebook's own mobile platform, the social-networking company began to generate a growing proportion of its overall advertising revenues from mobile.

Consider this: between July and September last year, mobile accounted for 14 per cent of the company's advertising revenues. That figure climbed to around 23 per cent in the three months to December. By March 2013, some 30 per cent of all advertising revenues since January had come from mobile.

The strength in the figures allowed the company's chief executive, Sheryl Sandberg, to declare last week: "We have an impressive share of mobile time spent and we have one of, if not the most-effective mobile app products."

Wall Street agrees, for now. As the share price recovers, focus is likely to shift to whether Facebook can maintain growing its mobile revenues without annoying its users with the number of ads that appear in their news feeds.

As Mr Zuckerberg noted in a call with analysts after the latest results on 24 July: "In recent studies, people have told us they noticed the ads more.

"Right now, ads on average make up about 5 per cent or one in 20 stories in [the] news feed. We haven't measured a meaningful drop in satisfaction when we ask people about their experience with Facebook. We're comparing that to the result we get when we ask the same question to people using a version of Facebook with no feed ads at all."

The social network: How Facebook evolved

Facebook came about in 2004 when Mark Zuckerberg, then a student at Harvard University, and his friends set up a social network for their classmates called "The Facebook". It grew so popular that they soon expanded to other campuses and began attracting the interest of outside investors. Among the earliest was Peter Thiel, the co-founder of the online money-transfer service PayPal, who ploughed in about half a million dollars in the summer of 2004.

By May 2005, as Facebook continued to grow in popularity, the website was valued at about $100m. In 2007, an investment from Microsoft reportedly drove up the implied value of the young business to an eye-watering $15bn.

As its user base and valuation swelled, attention turned to a potential stock offering. Facebook finally took the leap last year, offering shares to stock market investors in May. Today, nearly 700 million users turn to the social network every day.

On a monthly basis, Facebook serves more than 1.1 billion users, with a growing proportion – more than 800 million – using mobile phones and tablets to connect with their Facebook friends.

Nikhil Kumar