Perhaps the key issue that undermined Facebook’s float earlier this year was the rate of growth in mobile usage of its site and a self-confessed lack of understanding of how to monetise that usage. Perhaps Mark Zuckerberg is a faster learner than the market realised.
Earlier this week, Facebook released its third quarter results, which showed a 32 per cent increase in revenue against the same quarter a year ago and, excluding share-based compensation and related expenses, a rise in earnings from $US484 million to $US525 million.
It wasn’t the earnings number that pleasantly surprised the market, however, but Facebook’s revelation that 14 per cent of its advertising revenue had come from mobile ads in the quarter.
Zuckerberg told analysts mobiles would be fundamentally good for Facebook and that he wanted to "dispel this myth" that Facebook couldn’t make money on mobile.
While in the scheme of Facebook, the $US140 million or so of mobile advertising revenue it generated in the quarter is inconsequential, that it could generate any meaningful revenue at all is significant, and not just for Facebook.
Facebook, which had negligible mobile revenue in the preceding quarter and indeed throughout its relatively brief history, hasn’t been alone in struggling to monetise mobile users via advertising.
It is a particular issue for Facebook, which has just over a billion users but about 600 million, or 60 per cent – and the fastest growing segment of them – accessing it on mobile devices.
With the exception of Google, which can blur the distinction between search and advertising, companies generally have found it difficult to generate advertising revenues from mobile devices.
That’s a problem, particularly for digital content businesses, given the accelerating dominance of smartphones and tablets in accessing the internet.
In the US there are now more smartphones than PCs, with half the phones in that market smartphones. In Australia there are nearly three times as many wireless broadband connections as there are fixed broadband connections. Mobility is being valued more highly than speeds or screen sizes, although as 4G networks and subsequent generations of wireless technology continue to be rolled out speeds will become even less of an issue.
That’s a problem for Facebook and others because smartphones aren’t good vehicles for advertising and users of smartphones behave differently to users of desktops.
The major problem is that smartphone screens are small and therefore don’t deliver a good environment for advertising but users also tend to spend less time per session browsing and therefore are less valuable to advertisers.
The combination makes for lower yields – the US experience is than an ad on a smartphone is worth about a quarter of an ad on a PC.
Tablets, if the growth rate in their take-up continues as steeply as it has been since the launch of the iPad, might produce better results, although at this point their revenues are largely app-based and there aren’t enough of them out there to provide a digital ad revenue solution.
Also, monetising tablet revenues at this point probably means handing 30 per cent of the majority of it over to Apple, which dominates that market and its revenues.
That’s why Facebook’s ability to generate ad revenues will be monitored closely to see if it leverages and monetises its high-engaged user base to generate ad revenue without causing a backlash in the process.
At the moment it is adding ads to its news and other feeds but the obvious mechanism for leveraging the user base (and perhaps destroying it) would be to emulate Google and exploit the vast depth of knowledge and profiles the Facebook platform has of the users and their usage of the internet to allow targeted advertising. It is testing targeted ads at present.
Ironically, Facebook faces an analogous problem to that which has crippled the newspaper industry as the accelerating use of smartphones to access the web will cannibalise its higher-margin revenues from desktop ads.
Nevertheless, given the trend towards mobility appears inexorable, any lasting success in generating ad revenues from the devices would be encouraging for Facebook, other digital content providers and advertisers.