Back in August, Facebook announced a beta for a new ad unit to help drive mobile app installs on iOS and Android. That product was made available to all developers recently and the early user reports are very positive. Is this early success likely to translate into a long term win-win for both Facebook and the mobile developer community?

What are we talking about?

The mobile app install ads are bid for by developers on a cost-per-click (CPC) basis and displayed to Facebook users in the news feed on their mobile devices. Tapping on an ad takes a Re-user to the store page for the app, ready to purchase/download it. Essentially the offering is similar to many of the cross-promotion networks out there except that there’s only the one Facebook app promoting everyone else’s. Since Facebook’s app (or mobile site) has more users and engagement than all the others, it naturally gets the lion’s share of the value. Indeed even before the product was officially announced it was exposed as an expected $1B/year revenue generator.

Early success is unsurprising

Since the product is new and usage just ramping up, it’s not at all surprising that early adopters are seeing great success with it. Facebook will be controlling their inventory (the number of ads they show) to set a pricing level they know is better than the competition. Premium placement of the ads within Facebook’s app/site and the novelty factor ensure excellent click-through ratios (CTRs) in the early days and better targeting creates higher conversion ratios too. However, what remains to be seen is how well this will scale and whether users will tire of the ads rapidly. At the current level of $0.18-$0.60 per click with CTRs at 1-2%, Facebook will have to show an awful lot of ads to generate $1B/year. If too many ads are shown CTRs will fall, then they have to limit inventory and CPC will start to rise. The alternative is that Facebook has to find ways to improve the CTRs and/or conversions, partly through more engaging display but primarily through better targeting of the ads.

Who will Facebook App Install Ads work for?

As you’d expect, the beta testers for the service were quite large companies. Good m-commerce apps, as in one of the case study examples, will continue to succeed. Where purchase rates via the app are greater than desktop web equivalents and the lifetime value of a user is probably in the 10s or even 100s of dollars they can afford to pay significantly more than the current rate to acquire users. Larger game companies that generate excellent revenue per user from a free-to-play model, or have a large offering of games they can cross-promote themselves once they’ve got a new user, can also afford to buy customers in this way. In general if your revenue per download is significantly greater than the cost of acquisition then it makes sense.

What could go wrong?

For the average developer generating income directly from their software these user acquisition costs are simply too high, even with excellent conversion rates. According to Asymco, the current average revenue per download on iOS is $0.43 (from paid downloads and in-app purchase only, advertising revenues are generally lower though). Android has lower revenue per download than iOS on average. It’s clear that unless you have an app that generates significantly above the average level of revenue per download, this product is not for you as an ongoing marketing effort. It might make sense as part of a launch marketing campaign to kick-start downloads and ratings, generate a higher store ranking and hopefully better discoverability via search. By buying a critical mass of users you might also be able to get better growth via organic social sharing. This is where Facebook moving into mobile app install ads creates a conflict of interest that could be very bad for developers. Facebook’s open social platform is currently the most popular way for developers to market their apps. However just because your users post something from your app to Facebook, doesn’t mean their friends will see it. Facebook certainly has the technical capability to suppress such posts, they currently use it to remove Facebook game spam from non-players. Would they abuse this power to drive greater adoption of their ad product? Only time will tell.