As Facebook moves inexorably toward its much-anticipated IPO, attention has focused on all kinds of things about the giant network with the $100 billion potential market valuation — including the earth-shattering fact that CEO Mark Zuckerberg insists on wearing a hoodie during his meetings with Wall Street bankers and analysts. But what investors should be more focused on is the problem Facebook highlights in the most recent amendment to its S-1 securities filing: namely, that its mobile business is noticeably light on advertising revenue and that the company isn’t exactly sure how (or whether) it can fix that.
It’s worth noting the latest amendment isn’t the first time Facebook has mentioned that mobile could be its kryptonite. My colleague Kevin Fitchard wrote about a similar warning earlier this year, in which Facebook said it expected the rate of growth in MAU (monthly average users) of its mobile products “will continue to exceed the growth rate of our overall MAUs for the foreseeable future” but added that the company didn’t “directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven.”
Mobile could be an even bigger problem than Facebook thought
So if it had already flagged the mobile business as a potential weak spot, why has Facebook changed the language around its mobile aspirations yet again in this latest S-1 update? It appears the latest update is designed to clarify that this mobile ad-revenue gap is at least partly to blame for the weak advertising numbers the social network posted for the first quarter and that it is going to affect the second quarter as well. While Facebook initially said the weakness in the first quarter was a result of “seasonal effects” in the advertising business in general, it now says:
We believe this increased usage of Facebook on mobile devices has contributed to the recent trend of our daily active users (DAUs) increasing more rapidly than the increase in the number of ads delivered.
The revised S-1 notes that Facebook started to include its “sponsored stories” ad product in users’ mobile news feeds in March but adds that it doesn’t currently generate any meaningful revenue from Facebook mobile products and its “ability to do so successfully is unproven.” That statement is standard boilerplate language for an IPO prospectus, but it is also a key part of the Facebook revenue growth story, if there is one. The company says almost half a billion users accessed the site from a mobile device in March: If it doesn’t figure out how to monetize them efficiently, that is a serious problem.
The new language in the prospectus also hints at another aspect of the problem: namely, that the mobile environment is substantially different from a desktop one, and the decisions that make sense for the regular version of Facebook — particularly when it comes to things like ads, page views, etc. — don’t necessarily apply to the mobile version. As the S-1 says of the trend that has seen daily active users increase faster than the number of ads:
[T]his trend is driven in part by increased usage of Facebook on mobile devices where we have only recently begun showing an immaterial number of sponsored stories in News Feed, and in part due to certain pages having fewer ads per page as a result of product decisions.
Mobile ad dilemma is just part of a broader issue
Those product decisions are crucial for the mobile version of Facebook, which has already been criticized by many users as cluttered looking and cumbersome to navigate. More than one critic has argued that the mobile app Path — developed by a company co-founded by former Facebook staffer Dave Morin — is a far better mobile social network than Facebook, at least when it comes to design and usability. Of course, Path doesn’t have any ads at all, so figuring out how that works isn’t really a problem. Facebook doesn’t have that luxury.
The mobile dilemma is also just part of a much broader issue Facebook has to deal with, which is the fairly lackluster performance of its advertising in general — including click-through rates that are substantially lower than the already-dismal industry average and reviews from ad agencies and marketing firms that are underwhelming at best. If it is going to justify a $100 billion market valuation for any length of time, it is going to have to do better than that, and quickly.
In a recent Forbes column, Eric Jackson argued that Facebook (and also Google) is in danger of disappearing in five years if it doesn’t manage to figure out mobile. That prediction might be a little over the top, but there is no question the mobile market is crucial to Facebook’s future success: It already has half a billion users accessing the site that way, and even if they also use the desktop version, that number is likely to continue growing rapidly. The company has to come up with a way to monetize them in a hurry. But will sponsored stories be the solution? No one knows for sure.
Post and thumbnail images courtesy of Flickr users Jennifer Moo and dutchmassive
It is good to see so many discussions now addressing this issue. Perhaps the S-1 amendment was needed to trigger this, but the issue is real and requires attention. Here is my “Open Letter to Mark Zuckerberg, Sheryl Sandberg and Facebook Mobile” from Monday before the latest S-1 amendment last night. http://www.businessinsider.com/open-letter-to-mark-zuckerberg-sheryl-sandberg-and-facebook-mobile-2012-5#comment-4fabe79fecad04fb7800000f @phunware (Alan Knitowski, CEO, Phunware, Inc.)
Mobile revenues will come and they will be significant. They have to be with so many users, That’s the cherry that creates the investor upside. Savvy marketeers already know that mobile converts faster and better than online but it takes big advertisers longer to respond and shift spending but they will.
I find it laughable that they are so concerned with the advertising aspect of their mobile applications/websites when truly, they should first be concerned about the FUNCTIONALITY of these services. I often have trouble even just loading my News Feed, and this is not the first phone I have had such trouble with Facebook on.
At some point, mobile will stop displacing desktop and just supplement it. If people have a choice to use a big display or a phone, they will use the big display. They will use the phone only when there is no big display available. I dont’ see why the big display will vanish, unless everybody starts working in cars and trains and busses.
And while tablets may be mobile devices, they are large enough to carry the ads that generate revenue for sites like FB. They just need to optimize their apps or sites for tablets, and stop treating iPads like they are iphones.
All that being said, the biggest threat to ad revenue for google and facebook is not the growing popularity of mobile devices, but the seemingly infinite supply of places to advertise. With billions of dollars each year being invested in new dot-whatevers, there will be a lot more places to advertise. That will lower the cost of ads,although Google will be less susceptible than companies like Facebook to the price pressure those sites will bring, as Google lets you target people who are actually looking for something related to what you are selling. Almost everything else is the web equivalent of junk mail, and gets ignored.
I disagree with your post! all of it, mostly! Mobile is the future and the future is now! Advertise properly with mobile or die!
Facebook should tailor its mobile platform towards location base offers. If anyone feel the same or different spill it!
Maybe this explains why Facebook’s mobile app is so bloody awful.
A modern gadget maybe can handle and support the mobile ads. But how about old gadget? 35% facebook users is in Asian and many people in asian is in low standard living. People will leave facebook cause everytime they try to access facebook, the ads systems make the mobile gadget hang/freeze. Can’t do nothing if the gadget freeze.
If facebook really implements this ads to mobile, then this is the wrong strategy for making money.
Good Point – You really have to look at things from a global perspective these days…
lol Google doesn’t understand mobile? Eric Jackson must be on crack
From Daniel -Linked Post “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” Sounds simple, but I have to agree with Daniel! Strike while the iron is hot!