How can you benefit from Facebook and is Facebook an effective marketing strategies?

Facebook needs mobile friends to grow
Written by Assif Shameen Monday, 03September 2012 00:00

IT was billed as the IPO of the decade. Yet, nearly three months after its disastrous listing on the tech-heavy Nasdaq, social media giant Facebook is reeling as investors vote with their feet, sceptical advertisers watch from the sidelines and users try to figure out the best way to stay connected using its platform through smartphones and tablets.

On July 26, Facebook reported a revenue of US$1.18 billion (RM5.62 billion) in the second quarter, up 32% year-on-year, but missing analysts’ inflated expectations, on lower-than-expected advertising revenue growth as well as just 3.6% growth in revenue from Zynga, the social-game-platform provider that makes up the dominant share of its payments revenue. Advertising revenue for the quarter grew 28% year-on-year to US$992 million.

While that’s good growth in the current challenging global environment, it really doesn’t look too good when compared with competitors such as Google, which grew its ad revenue as fast as, if not faster than, Facebook. Indeed, Facebook’s ad revenue per user fell 2% year-on-year in the last quarter. Moreover, the social network operator posted a loss of US$157 million in the second quarter, compared with a net income of US$240 million a year earlier. Facebook had chalked up US$1 billion in profit last year on US$3.7 billion in revenue.

Not surprisingly, the company’s stock plunged 15% in the immediate aftermath of the results on July 27 before recovering slightly, only to fall again on subsequent trading days. Facebook’s stock is down nearly 46% from its Nasdaq IPO two months ago. For a high-flying company that just weeks ago was all set to enjoy a market value of over US$100 billion, the actual market capitalisation last week was just over US$50 billion — or roughly the same valuation it got more than a year ago from its last round of venture-capital funding.

Monetising user base While Facebook has 955 million registered users and the site is quite sticky to nearly half of them, its main problem so far has been the inability to monetise the burgeoning user base. In developed countries, most people who want a Facebook account already have one. Now, growth is coming from the wrong demographics — people in poorer countries in Africa, Asia and Latin America who are even harder to monetise than users in North America. A bigger issue is that Facebook, which started as a desktop-based social network, is seeing more of its users migrate to mobile devices for access. Brian Nowak, an analyst at Nomura Securities in New York, believes Facebook’s latest quarterly results are a glimpse of more teething pains to come as it attempts to monetise users who continue to migrate to mobile access.

Indeed, the big switch to mobile platforms has created a whole set of new issues for Facebook, which was started just eight years ago in a Harvard University dorm room by a bunch of geeks led by its founder Mark Zuckerberg. Much to its chagrin, the company has found it difficult to place clickable ads in small mobile devices such as smartphones. Even when users are willing to look at mobile ads or click on them, advertisers are reluctant to pay as much for mobile ads as they are for those on desktops. The faster the switch to mobile devices, the harder it becomes for companies such as Facebook to monetise their user base. Facebook executives such as COO Sheryl Sandberg say that while there are challenges in mobile monetisation, the company’s mobile ad revenue is running at an annualised rate of around US$180 million. That may be chump change for the effort and money it is pouring into mobile, but evidence that mobile could eventually become a decent revenue stream.

While it waits to get it right on the mobile platform, Facebook is desperately trying to monetise its desktop users. Yet, that’s proving almost as problematic. For one thing, revenue from Zynga, which creates social games such as FarmVille and accounts for 10% of Facebook’s total sales, is showing little or no growth. Ad sales actually represented 84% of Facebook’s total revenue in its second quarter, up from 82% in the first quarter — an indication that the firm is increasing its reliance on advertising at a time when other Internet players are focusing on increasing their non-advertising revenues to cushion themselves from an ad downturn in a more sluggish global economy.

More than 60% of Facebook users are currently outside North America, and the company earns less than 50 US cents per user compared with the more than US$3 per user in North America. Yet, Facebook is no emerging-market play because it remains shut off completely from such high-growth markets as China that have provided growth momentum to other tech players like Apple in recent years. “The big question is, how Facebook will monetise its billion or so users,” Daniel Ernst, an analyst with Hudson Square Research, notes in a research report last week. “A lot of people think they can’t convert those users to money. I don’t want to say the [Facebook] story is broken, but the story is kind of broken,” Ernst says in his note.

Finding new revenue sources With its revenue growth slowing and its mobile monetisation initiatives still nascent, Facebook faces formidable challenges in the years ahead. The good news is that with the recent IPO, it has more than US$11 billion cash in the bank, which it can spend to find new revenue sources. To drive its revenue growth, Facebook is spending about US$1.75 billion on capital expenditures this year and likely to plough in a similar amount next year. At the current rate of spending, it still has a few years to get its act together, though as a listed entity, that now has to be done in the public glare.

For its part, the social network operator is leaving few stones unturned to monetise its user base. Credit Suisse’s US Internet analyst Spencer Wang says he is monitoring Facebook’s new initiatives to improve monetisation, such as “Sponsored Stories” ads in its “News Feed” as well as the Facebook Exchange (FBX). Already, Sponsored Stories ads are reportedly generating around US$1 million in advertising revenue every day for the company, he notes. Sponsored Stories ads are likely to make up nearly 10% of Facebook’s total ad revenue by year-end.

The FBX is likely to deliver more targeted ads, which could help the company charge more for them. The exchange allows marketers to bid in real time for ad impressions by dropping a tracking “cookie” on mobile devices, which in turn gives advertisers some clues on users’ interests, based on their Facebook profile. If a Facebook user goes to the Prada or Coach or Michael Kors website, the Facebook cookie helps trigger ads from the sites. When the user returns from trawling through shopping sites, Facebook’s own ads might remind them that some of the items are still on sale at hefty promotional discounts. Facebook also recently began enabling advertisers to buy ads on its mobile News Feed.

Big-name advertisers While it is still early days, there is no shortage of advertisers who want to give new platforms a try. Eventually, it will be the backing of big-name global advertisers — such as Procter & Gamble, which has long been a fan of the power of social media, and General Motors, which abruptly pulled the advertising plug on Facebook earlier this year, but is said to be warming again — that will put the company back into the race against giants such as Google.

Nomura’s Nowak, who describes Facebook shares as “a call option on improved, long-term monetisation”, estimates that the company’s revenue will grow to US$4.8 billion this year and US$5.8 billion next year — a much slower growth than what he and some of his peers were forecasting some months ago.

Credit Suisse’s Wang says “Facebook is very well positioned to capitalise on the growth in social media” because of its “powerful platform”. He forecasts revenues of US$4.85 billion this year, up 31% from last year, and Ebitda, or earnings before interest, taxes, depreciation and amortisation, of US$2.5 billion. Facebook, he reckons, will continue to benefit from “the trend towards real identity, authentic online experiences and greater user personalisation of the web”. That means as its user base grows and the web transforms, Facebook might be able to tap other new sources of revenue quite apart from advertising and revenue from social-game creators such as Zynga.

For now, only one thing is certain. Facebook is unlikely to enter the hardware arena in the near future like Microsoft, Google and Amazon.com, who are trying to take a share in a market dominated by Apple and Samsung Electronics. While Facebook has been working on its own hardware, it is unlikely to jump into the fray until the dust settles on the current fierce battle between Apple and Samsung on the hardware front and Apple, Google and Microsoft on the operating software front. Analysts believe Facebook is likely to partner an existing hardware maker instead of trying to design and market its own smartphones and tablets, although such a partnership is months, if not years, away.

“If a Facebook-branded phone is now not on the cards, Facebook remains without a solid answer to its mobile problem,” says Andreas Pouros, chief operating officer at Greenlight, a London-based tech consultancy. “Yes, new ad formats have been and will continue to be launched by the company for mobile users, but there is a serious question over whether Facebook can integrate a compelling advertising offering on the smallest of screens which users will be comfortable with and that does not interfere with their Facebook user experience.

Facebook can still be a great company that can make lots of money, but in the mobile battle, Google and Apple remain far ahead of the pack.” Having won the hearts of desktop users over the past few years, Facebook’s challenge now is to be the social media for the mobile generation and to monetise that user base. Only then might it be able to entice investors to “friend” its Nasdaq-listed shares. — The Edge Singapore

This story appeared in The Edge Singapore on Aug 6, 2012.

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