Facebook (FB) was reminded last month that being a public company means others will judge your success and a large revenue report isn’t always enough to be a winner. Despite second quarter earnings meeting Wall Street expectations, investors were underwhelmed with the lack of a forecast for future quarters and -of particular interest to this ad executive- the shortsighted mobile platform strategy. The stock lost more than 8 percent the following day and shaved an additional 13 percent from there in after hours and pre-market trading. They opened that Friday with their then-lowest value since the IPO at approximately $23. They closed August 8th at $21.80.
To date, Facebook’s only mobile advertising tactic is Sponsored Stories. But they will need some sort of banner or other visual break from the News Feed if they are going to be successful. Websites today -even mobile ones- offer a variety of advertising opportunities, in part because regular visitors begin to “tune out” the ads they are accustomed to.
Approximately 57% of Facebook’s visitors (543 million out of 955 million active users each month) access the site via a mobile phone. The size of the mobile audience dictates that it must be the focal point of all revenue conversations at the company. Continuing to focus and rely on display ads for the desktop visitor will doom the company.
Are they beginning to address Wall Street’s concern?
Facebook announced last week a new prong to their mobile advertising fork in the form of mobile app ads. Developers will be able to create ads, determine targets, and set budgets, but the ads will still appear as a Sponsored Story in a new “Try These Apps” section of the platform. Even with this addition to the revenue pipeline it still doesn’t overcome the eventual evolution of Facebook users to begin to ignore the Sponsored Stories and read around them. Their fork may have more than one prong, but they have still arrived to the dinner table with only one utensil. In fairness, I believe this new app ad tool will be profitable. As Apple has shown the world, app developers make up a rapidly growing base of profit with a multi-billion dollar customer base behind them.
According to a recent SEC filing from Facebook, 15 million of their users (1.6%) spent real money on virtual goods in social games. That has translated to $378 million in the first half of 2012 for Facebook’s bottom line. But that hasn’t carried to the mobile platform for them yet. Additionally, Facebook only reaps 30% of revenue from in-game purchases. The remaining 70% goes to developers. If developers like Zynga (ZNGA) continue to suffer revenue and stock challenges, it doesn’t bode well for Facebook’s long-term revenue growth in the app market.
The year 2012 will be a success and possibly the first quarter of 2013, but revenues will begin to decline soon after they make their mobile platform more dynamic with Sponsored Stories and users begin to mentally tune them out. Facebook will need more robust yet subtle ad opportunities such as dynamically linked text, pop-ups, and video pre-roll to see genuine and sustainable growth.
Of course, in a worst-case scenario, they could start charging businesses for Pages. That would solve the GM problem.
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