LDN - Business

Facebook nears ad-only business model as game revenue falls

[May 05, 2017] By David Ingram

SAN FRANCISCO (Reuters) - Facebook Inc's growth into a digital advertising power is showing a flip side: The social network is more dependent than ever on the cyclical ad market, even as its rival Google finds new revenue streams in hardware and software.

Facebook reported on Wednesday that 98 percent of its quarterly revenue came from advertising, up from 97 percent a year earlier and 84 percent in 2012. Revenue from non-advertising sources fell to $175 million in the quarter, from $181 million a year earlier.

Facebook has warned for some time about declining non-ad revenue. That part of its business consists almost entirely of video game players on desktop computers buying virtual currency, and it has fallen as gaming has moved to smartphones.

Facebook takes 30 percent of purchases, with the balance going to companies such as Zynga Inc, maker of the game Farmville.

The company's dependence on advertising is a long-term concern but it has time to find other revenue while building its core ad business, said Clement Thibault, a senior analyst at Investing.com.

"We have to remember it's still a fairly young business. It's not like they're an old-fashioned business that needs to move soon," he said.

A Facebook spokeswoman declined to comment.

Facebook's share price hit an all-time high of $153.60 on Tuesday before dipping to close at $150.85 on Thursday.

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The Facebook logo is displayed on their website in an illustration photo taken in Bordeaux, France, February 1, 2017. REUTERS/Regis Duvignau

The lack of diversification stands in contrast to Google, a unit of Alphabet Inc. Its non-advertising revenue, from sources such as cloud services and Pixel smartphones, posted a 49.4 percent jump to $3.1 billion in the most recent quarter and now represents 13 percent of Google's total revenue, up from 10 percent a year earlier.

Facebook Chief Operating Officer Sheryl Sandberg said during a conference call in February that the company was diversifying revenue by expanding its base of advertisers across geographic regions and industries.

Facebook's non-advertising products, such as its Oculus virtual reality headset and the Workplace office software, currently generate little revenue.

Some companies diversify through acquisitions, but most of Facebook's purchases such as Instagram and WhatsApp have been in adjacent markets.

Chief Financial Officer David Wehner said in a conference call for investors on Wednesday that Facebook was not breaking out Instagram revenue as a separate line in financial reports because Instagram ads are sold through the same interface as Facebook ads.

(Reporting by David Ingram; Editing by Jonathan Weber and Grant McCool)

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