Nikhil Kumar: Facebook plays catch-up, but will it last?

So, it turns out that the rumours of Facebook’s demise were greatly exaggerated.

The social network’s first-quarter numbers, published after American markets closed last night, showed that mobile ads now make up about 30% of its overall advertising revenues. Some 751 million users, out of a total of 1.11 billion, now log on to the social network every month via their mobile device.

Go back a year, and it was all very, very different. Facebook seemed to have missed the memo on mobile. But now it has caught up — and how. Last night, net income at $219 million (£141 million) was less than Wall Street scribblers had predicted. But it didn’t seem to matter because of what the markets heard about mobile revenues, which as recently as the third quarter of 2012 accounted for only about 14% of advertising revenues. To have doubled that in six months is not bad at all.

The question now is whether Facebook, headed by Mark Zuckerberg, pictured, will be able to maintain the momentum. A series of ad products, including one that allows others to promote their mobile apps on its network, drove up mobile revenues. This works well for Facebook because its app is so widely used. In all, 3800 developers employed this kind of advertising to get users to download their apps (Facebook said such app billions had helped drive nearly 25 million downloads). The O2 network, for example, used Facebook to generate interest in its O2 Tracks mobile music app. It took just three days for them reach nine million people.

Other mobile ad products have also been rolled out to allow businesses to target their audience better. And it is clearly paying off for Facebook. But there is one very simple problem with mobile phones: size. Mobile screens are, and will, remain far smaller than laptop or desktop or even tablet screens. You’ll agree that they have to, otherwise what’s the point? This means that while there are ways of fitting two, three, four or five ads on a web page when it is viewed on a laptop or desktop without making users feel uncomfortable and thus turning them off, it is not so easy on your iPhone. There simply isn’t enough space.

Many apps steer clear of intrusive banners for that very reason and opt, for example, for less-jarring text-based links. To keep generating more and more money from mobile advertising — something Facebook will have to do if it ever wants its share price to come back to its offer price of $38 — the social network will have to find new ways to utilise the limited real estate offered by small devices.

Its Facebook Home suite of applications that turn select Android phones into always-on social media handsets tied to the Facebook network will help, in that it gives the company greater control of the available screen space. Right now, Facebook offers developers ads to promote their mobile apps inside its app. Once it controls your phone, it is not a great leap to imagine that Facebook could, say, offer them your apps folder: pay us, and we’ll make your app magically appear on users’ screens as a paid-for trial for a day or week or whatever. This is fiction at present, of course. But it is well within the realm of what’s possible.

However, the company will again have to tread carefully. Even if Facebook Home becomes a massive success, the social network knows that it can’t force too many ads and promotions down users’ throats. Which brings us back to the question of momentum: will it last? The peculiar challenges presented by mobile devices suggest that it will be very challenging to keep up this kind of growth rate. Over the short term, Instagram will help. The photo-sharing service, which Facebook bought last year, now has more than 100 million users. That’s 100 million people whom advertisers would love to target. Facebook has thus far kept the service ad-free, which makes sense because it would first like to grow the user base.

But be in no doubt: once Facebook has a big enough user base on Instagram and knows them well enough, it will roll out ads on that service. Further out, however, it is not clear how Facebook generates the kind of money from mobile and — more importantly for its profits — the kind of margins it would need to keep the markets happy.

This is not to say that it won’t be able to keep growing. It might come up with some bright new idea tomorrow morning. But there are grounds to be cautious, despite the positive headlines generated by last night’s numbers.