The world of business has been abuzz with rumors surrounding Facebook’s IPO and its $100 billion valuation as Facebook filed its S-1 on February 1st, 2012. At current expectations, Facebook’s IPO would rank the company among the world’s largest, and would be the “biggest Internet IPO in history”, besting Google’s of $1.9 billion in 2004.
The world of business has been abuzz with rumors surrounding Facebook’s IPO and its $100 billion valuation as Facebook filed its S-1 on February 1st, 2012. At current expectations, Facebook’s IPO would rank the company among the world’s largest, and would be the “biggest Internet IPO in history”, besting Google’s of $1.9 billion in 2004. However, the fact that a growing portion of Facebook’s user base accesses the companies services through mobile devices, and is currently not being monetized caused some concern for investors, particularly given analyst expectations surrounding total revenue. Debra Williamson, an eMarketer analyst, regarded Facebook’s 2011 revenue of $4.27 billion as “disappointing.”
Investors should not give up hope of a healthy IPO. Facebook plans to expand into mobile advertising by the end of March, thereby increasing its revenue streams, according to two people with knowledge of the matter. Given the potential increase and revenue and the impact this expansion could have on financial valuations, Chitika Insights conducted a scenario analysis to determine potential revenue increases for Facebook brought on by the expansion of advertising into the mobile space. The results of this analysis can be seen below, along with a detailed explanation of the methodology behind it:
There are certain elements of Facebook’s S-1 which may not bode well for its IPO or investors, such as new European privacy rules, decelerating revenue, or unclear measurements of Facebook’s true user base. However, the additional revenue the company stands to generate through monetizing its mobile traffic is by no means insignificant. In the best case of our scenario analysis, Facebook would be able to generate $2.54 billion in revenue from the new mobile traffic, would lead to a 68.6% increase over 2011 total revenue.
As mobile devices emerge as a major form of personal computing, companies will have to put greater emphasis on the mobile sector in order to remain relevant and competitive. With an estimated 33% of usage already occurring on mobile devices, Facebook’s foray into mobile advertising is well timed, amidst IPO rumors and revenue concerns. Furthermore, mobile web usage has been projected to continue to grow over the course of 2012, after almost doubling in 2011, making an established mobile platform and methods to monetize all that much more important.
First we established the number of daily page views (PVs) seen by Facebook. Alexa reports that the average Facebook user generates approximately 13 daily PV’s. Combining this with 483 million active daily users (as reported in Facebook’s S-1) we arrive at approximately 6.33 billion daily PVs. To convert total daily PVs to just mobile, we cite Mary Meeker’s report at Web 2.0, which states that 33% of all of Facebook’s traffic is mobile. Therefore, we estimate that Facebook’s mobile traffic amounts to approximately 2.09 billion PVs per day.
To determine the value of individual PVs, we analyzed the S-1 of Facebook in 2011 to determine the approximate revenue generated by advertising (85% of total revenue in 2011). Facebook’s S-1 states that the company earned $3.71 billion in total revenue, which approximates to $3.154 billion in advertising revenue.
To estimate the number of PVs responsible for generating advertising revenue, we first estimate what PVs did not generate advertisements. Remember, Facebook does not currently advertise on its mobile platform. Since we know that 33% of Facebook traffic is mobile, and the Chitika internal data shows us that 94.7% of that traffic came from m.facebook.com (and hence is currently un-monetized), we know that 31.3% of overall Facebook traffic is not currently being monetized. This leaves us with 68.7% of traffic that is already monetized, or approximately 1.59 trillion monetized PVs per year, or approximately 9 PVs per user per day (and 723 billion un-monetized PVs per year).
We once again cite our own proprietary statistics to approximate the click through rate of all Facebook traffic, both mobile and non-mobile. To determine this, we use our own network statistics to estimate the CTR of Facebook users, measured by analyzing the website that referred the user to the particular site (example: a person posts a link on facebook.com, referring them to xyz.com, we measure the traffic on xyz.com that was generated from facebook.com). Then, we separated impressions from mobile and desktop (by analyzing the user agent of each individual impression in our sample) to determine the CTR of the respective segments (mobile vs. non-mobile). Keep in mind: this does not directly estimate the CTR of advertisements on Facebook, but rather the susceptibility toward advertising of particular facebook.com users; however we feel that this is a reasonable estimate and will use it for purposes of this study. After this analysis, we determined that traffic on our network generated from Facebook averaged a 0.39% CTR on mobile traffic, and a 0.11% CTR for non-mobile.
Now, since we know the total number of non-mobile PVs from Facebook (1.59 trillion, from above) and the total revenue made from these views ($3.15 billion), we can say that their revenue per thousand PVs is simply:
For a given PV, the expected revenue earned will be the probability of someone clicking on an ad on the page multiplied by the Cost per Click (CPC — the amount received by Facebook for each click). If we assume that CPCs on mobile and desktop are equivalent, then the revenue per PV on mobile traffic can be calculated as follows:
Plugging in, we get:
Now, finally, to determine the total revenue from these ads, we simply need the total expected mobile impressions. In this case, we made the assumption that Facebook’s mobile advertising platform will generate 1/3 of the ad impressions seen in its traditional program, due to space constraints, as well as to preserve the aesthetics and quality of the user experience since mobile devices operate at a lower resolution and with a smaller screen size. From 2011, since we estimate there were 723 billion mobile PV, we can calculate the total expected revenue for these PVs, using an assumption of 33% of ads per mobile page view.
If we extend the ratio of mobile ad impressions to non-mobile impressions in either direction to 16% and 50%, we get a revenue range between $814 Million and $2.54 Billion.