Facebook Inc. Is Doing Apple's and Google's Jobs for Them

By Markets Fool.com

It used to be a lot easier to make a hit app. Six years ago, it seemed like all a developer had to do was upload his creation to the Apple or Google app store. Now with more than 1 million apps in each app store, it's entirely too easy to get lost in the crowd of apps.

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Facebook's mobile app install ads. Source: Facebook

Facebook was one of the first to take advantage of the need to promote apps. Its app install ads have grown wildly popular among developers, who are expected to spend as much as $4.3 billion on them this year.

Recently, Facebook rolled out a new bookmark in its mobile navigation menu called "Find Apps," which was discovered by TechCrunch writer Josh Constine. The bookmark presents about 25 personalized app recommendations from developers that purchased app install ads. This is a feature that ought to be present in the Google Play Store and Apple App Store, but has been noticeably absent (at least to me).

Personalized app recommendations
Apple's App Store is missing personalized app recommendations. While it has its Editors' Choice and most downloaded lists, neither are curated just for you. Google does a little better with its recommendations, but most downloads are still based on what's already popular in the Top Charts.

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Comparatively, Facebook app install ads are targeted directly at you (at least, users that are very similar to you) based on your likes, friends, current apps, and other demographic data Facebook has on you. As a result, it's more likely you'll be interested in Facebook's app recommendations than Apple's Editor's Choice.

The "App Ad Feed," as Contine calls it, functions as a list of personal app recommendations for users. And Facebook is getting paid just as much for these ads as it does for app install ads in the regular Newsfeed.

There's no reason Google or Apple couldn't do this
Google is well ahead of Apple when it comes to app install ads and personalized recommendations. The company bought mobile ad platform AdMob in 2009, and has a strong understanding of its users Internet habits. Opening up the front page of its app store or app search results pages to advertisements from its existing app install ad customers, could double its app store revenue.

Meanwhile, Apple knows a lot more about its users than you might think. Each iTunes account is connected to a credit card with valuable demographic information, and it already knows what other apps, music, and movies you're into based on previous iTunes purchases. The company also purchased app discovery site Chomp in 2012, but has yet to do much of anything with it.

Google and Apple will happily let Facebook do all the work
Still, Facebook may be better at recommending apps than both Apple and Google, and both companies are happy letting the social network do all the heavy lifting. Both app store owners benefit from Facebook's app install ads, as they take a 30% cut of any paid apps and in-app purchases.

The new App Ad Feed provides Facebook with an opportunity to nourish its growing cash calf and benefits the company in a couple ways. First, a dedicated feed of app recommendations means it can afford to annoy its users less or fill more ad inventory.

Second, a dedicated app feed allows Facebook to charge more per ad impression. The only reason a person would choose to browse a bunch of app ads is because they're interested in downloading a new app (or researching an article). Stronger intent means better conversions, which results in higher average ad prices for Facebook.

On the other side, Facebook has to do a lot of hard work selling app install ads to developers in order to make these recommendations useful for users. That's hard work that Apple doesn't seem particularly interested in doing as its iAd mobile ad unit has yet to take off as initially predicted. Google is more likely, but is still focused on improving mobile ad revenues elsewhere.

Growing revenue faster than expected
As a result, the current landscape is mutually beneficial for all three companies, and Facebook's $6.2 billion in mobile advertising revenue (trailing 12 months) looks poised to continue growing.

Last quarter, 90% of Facebook's revenue growth came from mobile ads, and app installs were a large part of that. If the App Ad Feed takes on a larger role in Facebook's app or increases average ad prices as I expect it will, Facebook could outperform current revenue estimates. Margins might not be as good, however, as Facebook will have to spend more on sales teams to fill ad inventory.

The article Facebook Inc. Is Doing Apple's and Google's Jobs for Them originally appeared on Fool.com.

Adam Levy owns shares of Apple. The Motley Fool recommends Apple, Facebook, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Facebook, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.