Updated from 2:25 p.m. EST to correct app download stats on 3rd page, 4th paragraph.
NEW YORK (TheStreet) -- Doubts over whether Facebook (FB) could effectively monetize its user base have mostly been soothed after the social network confirmed record mobile advertising revenue and growth at a rate far higher than even optimists expected.
The Menlo Park, Calif.-based business reported mobile advertising revenue of $1.66 billion, 62% of the company's total, and noted that of its 1.32 billion monthly active users, more than 81% had accessed Facebook on mobile.
As a whole, mobile advertising is expected to grow 75% globally to nearly $32 billion this year, according to eMarketer estimates, with Facebook and Google (GOOGL) leading the race to seize the surge in new business.
Should Facebook fall behind, though, it has much more to lose than Google. While mobile is making up a larger chunk of the companies' total revenue, Facebook's dependency on the revenue stream is nearly double Google's. eMarketer forecasts mobile to account for 63.4% of Facebook's 2014 total revenue compared to Google's 33.8%.
Given mobile is such an interwoven arc of Facebook's long-term narrative, there are some pitfalls Facebook needs to overcome, including...
1. Slowing Growth
The first is that as more players enter the space, and Google continues to grow, the profits for the taking are less than they were before the initial buying spree.
"The space is becoming bigger so that growth becomes slower," noted eMarketer analyst Martin Utreras, speaking with TheStreet. Within four years, segment growth is expected to slow to 22.2%, though by then, total mobile advertising spending worldwide will have topped $94.9 billion.
Including both mobile and desktop advertising, the data research firm predicts 56.4% growth for Facebook compared to 63.3% in 2013. No small advance, but shrinking money-making potential nonetheless.
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Jay Hallberg, industry specialist and co-founder and COO of IT social network SpiceWorks, told TheStreet, argues this is just the ebb and flow of a market in its infancy. "You have this disenchantment and then afterwards everything stabilizes a bit. We're probably a bit in the frothy early years," he said. "When you start getting into 20% growth rate environments (which you might see in 2017 and 2018) things have stabilized pretty well. As you head into 2015, it might be the year of reckoning and reality."
Facebook's current offering isn't without its own pitfalls, too. "While mobile usage is growing faster than desktop, Facebook is still evolving its mobile ad products," wrote Oppenheimer analysts Jason Helfstein and Jed Kelly, citing it as a potential risk to their "outperform" rating in a research report late-July.
2. Click-Through Engagement
Click-through engagement on mobile remains weak. eMarketer finds that of the 70% of adults in North America who had encountered a mobile ad over the past month, an average 30.5% had clicked. In France, Germany and U.K., the other regions polled, the results trended even lower.
Of the reasons why those polled in the U.S. hadn't clicked on the ads, the top two reasons were that the offering wasn't of interest or wasn't relevant. Though this isn't a concern exclusive to Facebook, a lack of conversion on mobile could weigh on the continued demand among advertisers.
Already Facebook has shown this is a problem it hopes to solve as it tinkers with the efficacy of its targeting. The market should also help to sort this out, said Hallberg. "Where that gets neutralized is just the massive amount of views on mobile devices and so it may be a lower price-per-click, they're making up for it with such high engagement," he said.
3. App-Install Ads
Facebook's long-term mobile robustness is also limited by the types of advertisers its offering currently appeals to. For instance, the glut of app-install ads, advertisements geared towards getting its audience to download and open a smart-device application, could hurt the company in the long run.
That's a concern Facebook has previously mediated, however. "The mobile app-install ads, which are run not only by developers but also by large companies that want to get people to install apps, are growing," COO Sheryl Sandberg said in the company's second-quarter conference call. "But we see our opportunities in mobile ads as much broader than just installing apps."
In a previous note, JPMorgan analyst Doug Anmuth proffered that app-install ads now represent one-fifth to a quarter of total mobile revenue, not as dominant a sub-sector as feared but still a major contributor to the top line.
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Facebook mobile ads used for this purpose have been undeniably effective. In a first-quarter conference call in April, CEO Mark Zuckerberg said, "App Installs has been one of our best performing ad products, driving over 350 million installs to date. Over 60% of the top grossing apps on the Apple App Store and Google Play use Mobile App Ads."
However, the longevity of this app boom is dubious. "It begs the question, how big is this market?" asked Hallberg. "There's a small set of people who are making a ton of money and a bunch of people who want to be." Of that minority, 1.6% of app developers make as much, if not more, than the others combined, according to VisionMobile data (and referenced by Financial Times). Even those making money, like King Digital's (KING) Candy Crush, are seeing waning demand as consumers grow fatigued by the excess of mobile games flooding their app stores.
"There are concerns that there may be an app bubble going on," Arvind Dixit, social expert and CEO of paid-social platform Bubblews. "If that does bubble, that could really hurt Facebook's mobile advertising."
Dixit argued a lack of focus on mobile-friendly e-commerce outside of app installs and digital goods has limited Facebook's appeal to a broader range of brands and advertisers. "Their biggest weakness from a mobile standpoint is that they're not really converting many people to actually make purchases that aren't just digital goods," he said.
"People are already ordering through their mobile phones on Amazon; there must be something wrong with the way Facebook is doing it and they have to figure out a way to provide a safe user experience where people want to click buy," he added.
To counter this problem, the social network recently announced a new tool that could track advertising conversions across platforms, meaning that if a user sees an ad on mobile and purchases the product on desktop (and vice versa) the action is logged and the effectiveness of the ad communicated.
Analysts remain optimistic Facebook can navigate these challenges. After all Mark Zuckerberg's creation has encountered them before -- when the company went public in mid-2012, its mobile revenue was negligible and it is now its largest money-maker.
In a late-July research report, Baird analysts justify their support: "We view Facebook as an emerging advertising powerhouse, with multiple short- and long-term growth levers, including an ad network, video ads, e-commerce/direct response, among others."
A Facebook spokesperson declined to elaborate on mobile advertising figures currently available.
-- Written by Keris Alison Lahiff in New York.