Facebook (FB) Should Be Afraid of Google's New Product

By Markets Fool.com

Continue Reading Below

Facebook's app-install ads are big business. Source: Facebook.

App-install ads have been a boon for Facebook and its transition to mobile ad domination. The ad units account for an estimated 30% of total ad revenue for the social network, according to eMarketer. But the company might have some new competition for app developers' ad dollars.

Google announced that it plans to let developers advertise their apps within its Google Play Store's search results. Google already offers app-install ads as part of its mobile search ads and AdMob products, but advertising within the app store has much more potential to attract developers' ad dollars away from Facebook.

Google's product is a slam dunk
Google's new ad units within the Google Play Store capitalize on a couple of its advantages. First, a user typically only visits the app store when he or she is interested in downloading a new app. Second, it uses its proven keyword-based system to serve ultra-relevant promoted-app ads. This ensures that its app-install ads will convert well.

Continue Reading Below

New ads will start appearing in the Google Play Store soon. Source: Google.

As such, many developers will be in a situation where they have to bid on those ad units for fear that the competition will do so and capture some downloads that would have otherwise gone to them. That takes money out of an ad budget that was largely slated for Facebook's app-install ads.

Of course, the entire market for app-install ads is expected to grow considerably over the next few years. Business Insider expects the U.S. market to add $1 billion in ad spend this year, increasing the total to $4.6 billion. Another estimate sees the U.S. market growing to $11 billion by 2017.

So there's plenty of room for both Google and Facebook to play in the market along with Twitter, Apple, and others. However, Google's new units could hurt Facebook's growth.

Mobile ads aren't all app-install ads
On Facebook's second-quarter earnings call last year, COO Sheryl Sandberg clarified that the company's growth in mobile advertising isn't completely reliant on app-install ads.

"I do think sometimes people think that mobile app install ads are all of the revenue or a great majority of the revenue, and they're not; they're only part of the mobile ads revenue," she said. "Our mobile ads revenue is broad-based. We have large brand advertisers, small SMBs, direct response advertisers, as well as developers using our mobile ads. ... We see our opportunities in mobile ads as much broader than just installing apps."

Indeed, Facebook just announced that it recently passed 2 million active advertisers. Sandberg notes that most advertisers use promoted posts as their first form of advertising, and research from eMarketer shows that page posts make up a rapidly growing majority of total ads.

What's more, Facebook's passive ad display strategy may be more appealing for some developers that make apps in categories that aren't often searched for in app stores. And developers making apps in crowded categories can still benefit from the personalized targeting of Facebook over the keyword-based strategy of Google.

Developing new products
There's a reason Facebook hasn't rested on its laurels with app-install ads. It knew other platforms were capable of offering similar ad units, and Google's promoted-app ads within the Google Play Store represent the biggest threat yet.

Facebook added app-engagement ads -- which are aimed at people who previously downloaded the app and stopped using it. Late last year, it added video capabilities to app-install ads -- which leans on its growing advantage in auto-play videos.

Still, the move from Google shows how narrow the moat is around one of Facebook's most valuable customer segments. It's not a reason to sell the stock, especially considering the growth in total advertisers, but it might curb growth expectations.

The article Facebook (FB) Should Be Afraid of Google's New Product originally appeared on Fool.com.

Adam Levy owns shares of Apple. The Motley Fool recommends Apple, Facebook, Google (A shares), Google (C shares), and Twitter. The Motley Fool owns shares of Apple, Facebook, Google (A shares), Google (C shares), and Twitter. 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.