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Summary:

In its IPO filing Facebook mentions the word “mobile” 123 times but didn’t use the term in positive ways. In fact, Facebook’s S-1 filing is one big warning to investors: Its growth is being driven by user behavior that it has so far failed to monetize.

Kryptonite mineral green

In its IPO filing Facebook mentions the word “mobile” 123 times, which, given the term’s buzz-worthy status, is hardly surprising. But in most cases Facebook doesn’t use the word “mobile” in positive ways. In fact, it identifies the proliferation of traffic to its mobile app and website as the biggest risks that its advertising-driven business model faces. The S-1 filing is one big official warning to potential investors: Facebook’s future growth is being driven by user behavior that it has so far failed to monetize.

Of Facebook’s 845 million monthly active users (MAUs), 425 million accessed Facebook in December alone through a smartphone or feature phone app or through its mobile-optimized website. In 2011, 85 percent of Facebook’s $3.7 billion in revenues came from advertising, but none of it came from its mobile platforms, over which it doesn’t serve up display ads. Despite that huge gap, Facebook is doing nothing to discourage the shift in use to handsets and tablets:

We anticipate that the rate of growth in mobile users will continue to exceed the growth rate of our overall MAUs for the foreseeable future, in part due to our focus on developing mobile products to encourage mobile usage of Facebook. Although the substantial majority of our mobile users also access and engage with Facebook on personal computers where we display advertising, our users could decide to increasingly access our products primarily through mobile devices. We do not currently directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven. Accordingly, if users continue to increasingly access Facebook mobile products as a substitute for access through personal computers, and if we are unable to successfully implement monetization strategies for our mobile users, our revenue and financial results may be negatively affected.

As the S-1 points out, most Facebook members use mobile to supplement their PC activity, not replace it, so the company does ultimately put its ads in front of their eyes. But that won’t always be the case. As my colleague Mathew Ingram pointed out on Wednesday, Facebook and its ambitious CEO Mark Zuckerberg want to rewire the structure of society, making its social network a common medium for meaningful connections among all the world’s peoples and institutions. It is a grand vision, but it also depends on establishing connections to billions of devices that aren’t PCs.

One telling figure in the filing is Facebook’s estimates of its penetration in India, which it pegs at between 20 and 30 percent. India is the world’s second-largest market, but very few of its 1 billion-plus people have a PC or the means to access one. There are 700 to 800 million potential Indian customers for Facebook, and for most of them the social network will be a mobile-only platform.

In the developed world, PC penetration is much higher, but younger generations are increasingly relying on their handsets as their primary means to access the Internet. PC sales are falling off as well, replaced by tablets — another platform Facebook doesn’t utilize for display ads.

A problem with an easy solution

Facebook’s problem has an easy fix: It can simply start putting ads in its mobile apps and website. According to inneractive, the mobile advertising market is booming with ad spending, up 464 percent since February of last year and with a huge 983 percent boost in North American ad spend alone. Berg Insight predicts that mobile will account for 15 percent of all global online ad sales by 2016, making it a $22.5 billion market. Facebook itself in its S-1 estimates that the global mobile ad market in 2010 was $1.5 billion, a market it easily could have tapped into.

My guess is that Facebook just doesn’t want to put apps into its mobile products — at least not yet. There is limited real estate on a handset screen, and Facebook probably doesn’t want to clutter up its slick interfaces with display ads, especially while it is still formulating its mobile strategy. The company is also trying to develop more-innocuous ways of advertising on the small screen. In its S-1 it mentions the possibility of inserting “sponsored stories” in its members’ news feeds.

Though it didn’t mention it in its filing, Facebook may also be investigating nonadvertising means of monetizing mobile traffic. While the social network has free rein in the PC browser, its actions in mobile are limited by the capabilities of the devices its mobile apps reside on, as well as the whims of the vendors who make those devices and the carriers who sell them. Though no operator or OS maker would be insane enough to block the world’s most popular social network, that codependence may require Facebook to partner more closely with key players in the wireless industry, and that, in turn, could lead to revenue opportunities.

France Telecom’s Orange is already working closely with Facebook to sell phones optimized for its social networking features in many of its developed and developing markets. In some countries, Orange is selling plans that include unlimited Facebook access while metering all other data use. The carrier and Facebook haven’t revealed any financial details of the deal, but I would not be surprised if some of those revenues were making their way back to Menlo Park.

Either way, Facebook’s filing makes it clear that it has to do something to monetize its mobile traffic soon. The company will soon be public, and while it will likely be controlled by Zuckerberg and those loyal to him, investors will question why Facebook is devoting so much effort and so many resources to building a mobile business it makes absolutely no money from.

Image courtesy of Flickr user lrargerich

  1. It’s sort of difficult for me to believe that they can not see the path to monetizing mobile! The innovation of GroupOn is not offers.

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  2. Facebook could accomplish what you’ve suggested by placing ads (or better, contextual promotions or messages) onto users’ News Feeds and Pages directly, perhaps inserted between every “n”-number of Posts. But they’d need to offer their users something in exchange for this (more control, an opt-in system where users allow their News Feed to include third party promotions and messages, etc.).

    Social networks are becoming a top source of referral business – far more than ad-banner clicks. If done correctly – in a way that doesn’t compete or interfere with the way that individual FB users right now are already using the platform to promote themselves, their own influence, and their own offerings – Facebook could help third parties to get the referral business they so desire from all social networks, by making facilitating that connection and possible referral/revenue sharing arrangements between users’ News Feeds and Pages, and selected vendors with an interesting offer or promotion.

    In other words, FB should enable users themselves to be the marketplace for third-party promotions, able to select (with some OpenGraph help and recommendations) vendors and offers they feel comfortable sharing with their personal network.

    Yes, it’s Facebook’s network, and Facebook could do whatever they want. But if FB wants to monetize any mobile, and further desktop usage, they need to understand that empowerment of users is the best path to success (and in fact has been key to FB’s success so far).

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  3. Facebook missed the boat on mobile, if they had even a little advertising from the start the precedent would be set and they could do whatever they wanted without too much backlash. But once people have it for free without advertising it is hard to go back.

    Whatever long term strategy they adopt they need to allow people access to AD-free mobile use if they want to pay for it. Whether that is $.99 a pop for the AD free version of the app or a “premium” account subscription that means no adds on mobile and maybe some other extra features. People are used to this now with many other apps and don’t mind dropping a small amount for a clutter free experience.

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  4. Surely, mobile is not Kryptonite, but a coming massive windfall for Facebook?
    Also, don’t take the section on “Risks” in the S1 so seriously, it’s full of boiler plate negative scenarios, such as Zuckerberg could die, or leave, then we’d be up the creek, etc.

    And, “…while it will be likely be controlled by Zuckerberg and those loyal to him” Likely? What would change the fact that he controls 57% of the voting stock?

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    1. Hi Tom,

      I agree, mobile will be a big opportunity for FB when it figures out how to monetize it. I thought the metaphor was apt though because as it stands now the closer it Facebook gets to mobile the weaker it becomes financially.

      As for the voting control, I’m just leaving open all possibilities. I shares Zuckerberg controls are sold, he loses their votes, though his control won’ be diluted that much since they revert to Class B shares. It is a possibility that everyone cashes in and he loses voting control, isn’t it?

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