Facebook continues to do what few digital publishers can pull off: Over each of the last five quarters, the social network has been able to boost revenue even as it sells fewer ads.
The ability to raise prices has rocketed Facebook's overall revenue to $3.85 billion in the most recent quarter. In the final three months of 2014, Facebook served 65% fewer ads than a year earlier, but the average cost of those ads to advertisers was 335% higher.
While Google, Yahoo and many digital media companies are trying to squeeze ads in to more places to make money, Facebook has gone the other way. Despite a seemingly endless amount of inventory, it is trying to create a sense of scarcity around the ads it serves.
Over the last two years Facebook has cut the number of desktop ads displayed on its right rail, where people seldom paid attention anyway. Rather than compensating by putting more ads in people's news feeds -- which is more expensive for advertisers and the only place where Facebook shows ads on mobile -- Facebook cut the number of news feed ads as well. Despite this move, Facebook has managed to grow its average revenue per user.
Facebook's decision to not grow its ad business by simply displaying more ads "was a pretty controversial strategy internally" but has paid off over the last year, CEO Mark Zuckerberg said during the company's earnings call on Wednesday. Instead of pushing ad quantity, he said the company has emphasized the quality of its ads' content.
In effect Facebook -- a company that used to claim it had a Super Bowl-size audience every day and has only become bigger -- is treating its audience like a televised sporting event. By fixing the number of ads it will show that audience, those ads are more valuable to advertisers because of their scarcity.
Advertisers poured $3.59 billion into the company last quarter, 53% more than they spent a year earlier. Facebook's overall revenue totaled $3.85 billion, up 49% year-over-year, beating analysts' estimates. The company earned $701 million during the quarter.
There are two big reasons Facebook has been able to sell fewer ads at higher prices: mobile and data.
Facebook continues to solidify itself as a mobile company. In the fourth quarter, 84% of the company's daily audience visited on a smartphone or tablet, while 69% of the company's advertising revenue came from ads shown on such devices.
Facebook's ability to close the gap between its mobile audience and mobile revenue (now just 15 percentage points, down from 38 percentage points at the end of 2012) is especially important to protecting its business.
There remains a big gap between where Facebook makes its money and where its users are, geographically speaking. A year ago the U.S., Canada and Europe accounted for 75% of Facebook's revenue but only 39% of the people who checked in on Facebook each month. A year later little has changed. In the fourth quarter of 2014, those regions contributed 75% of Facebook's revenue and 37% of its monthly audience.
If and when the day comes that advertisers are no longer willing to pay higher prices for fewer opportunities to promote themselves in mainstream markets like the U.S., Facebook will need to recoup that money in emerging markets. That's why the company is making a bigger push in markets like India, where people almost exclusively check Facebook on their phones.
Facebook's data is also a major security blanket. All the information Facebook collects on the people who use its social networkhas been used to boost its ad rates but keep them tolerable for media buyers. The more targeted an ad can be, the more it costs.
Now Facebook is starting to extend that ad-targeting outside its own properties. Last year it opened up a mobile ad network to sell ads that would run in others' apps. And it bought a company called LiveRail to do the same with lucrative video ads. Both businesses let Facebook hang on to advertisers who can't buy as many ads on Facebook as they would like but still want to use Facebook's data.
Facebook is being very careful to make sure those off-Facebook ads don't cannibalize its core business. When Facebook officially opened its mobile ad network last fall, it said advertisers couldn't buy off-Facebook ads without buying on-Facebook ads.