Mark Zuckerberg's to-do list

A year on from its IPO, Facebook needs to work hard to keep its users engaged and improve the quality and sophistication of its advertising

This month marks Facebook’s first year as a public company and the publication of its 1Q13 results. So it’s a fitting time to assess the social network’s progress since its frenzied IPO, and to identify the key challenges it needs to address.

Facebook has made solid if not spectacular progress over the last 12 months, with mobile proving its biggest success. However, a closer look at the service initiatives and investments undertaken during this period reveals a more uneven picture.

Although its advertising revenues are growing, Facebook needs to improve the quality and sophistication of its advertising, and must do so in a way that does not conflict with user privacy. The social network must also work harder to keep users engaged; it must ensure it can compete with the range of alternative social platforms and applications vying for consumers’ attention.

Facebook’s rising star

Facebook’s results show that mobile use is continuing to rise. The number of mobile monthly active users reached 751 million (out of a total base of 1.11 billion users), up from 488 million in the same period last year. This growth in mobile will only accelerate going forward, particularly in emerging markets, where mobile will be the primary (if not exclusive) way that many users interact with the social network. In this context it is critical that Facebook is able to monetise mobile, and it has made good progress on this front since its IPO. In the first quarter of 2013 mobile advertising accounted for 30 per cent of its total advertising revenues, up from 23 per cent in Q4 2012. Prior to its IPO, mobile advertising contributed almost nothing to Facebook’s revenues.

Facebook’s mobile advertising performance was boosted by its App Install Ads product, which it launched in October 2012, and which allows app publishers to pay for adverts to appear in users’ mobile news feeds. It will be interesting to see how Facebook Home affects mobile usage and advertising going forward. The Android home-screen application, launched in April 2013, is designed to make Facebook’s services better, more immediate, and easier to use on the fast-growing base of Android devices. It will also allow Facebook to track users’ behaviour on devices at a deeper level, which will provide more advertising opportunities.

It will also be interesting to see how the social network’s April 2013 acquisition of Parse assists its mobile efforts. Parse is a mobile development platform that, among other things, supports freemium business models that can in turn incorporate advertising.

Service developments produce mixed results

Facebook has invested heavily in service development over the past 12–18 months, including through acquisitions such as its high-profile purchase of Instagram. These investments are necessary: Facebook must keep unveiling new services and features in order to keep users and advertisers engaged, and thereby prevent the migration of users and advertising dollars to rival platforms. However, its product investments have eroded margins, putting the new acquisitions and services under scrutiny, and the results have been mixed.

On the plus side, Facebook Exchange, the revamped News Feed, the Custom Audiences targeted advertising tool, and the aforementioned App Install Ads are all making positive contributions to advertising revenues. However, high-profile consumer-facing initiatives have proved disappointing or have had little impact; the revamped Timeline has not excited users, Facebook Gifts had a muted response, and Graph Search was barely mentioned in the company’s latest results. The number of Instagram users is rapidly increasing (it reached 100 million monthly active users in in the first quarter of 2013), but any concrete progress on monetising the service remains vague.

Working harder on advertising and users engagement

Facebook’s approach to advertising needs to be more sophisticated. For all the talk about – and fear of – targeted advertising on Facebook, what is actually served up is often poorly targeted, meaning it is irrelevant to users and ineffective for advertisers. By this stage in its development, Facebook’s advertising should be a lot better than this. We would also like to see the social network articulate the advertising opportunities around Graph Search, particularly sponsored search.

A particular challenge for Facebook in the longer term, and one that is critical for advertising, is to keep the momentum behind active use. The social network had a total of 1.11 billion monthly active users in Q1 2013, a modest increase from 1.05 billion in Q4 2012. Active use has been erratic over the years, and is not as high now as it has been in some previous quarters. A danger for Facebook is that people might start spending less time on its network as they find other social experiences to engage with.

These could be popular, free OTT VoIP and messaging apps such as WhatsApp, blogging and content sharing sites such as Tumblr, or more private social networks such as Path. In fact, one of the key reasons that Facebook acquired Instagram was that younger users were flocking to it, while the launch of Facebook Home was also in part a response to the rise of rival OTT applications.

Eden Zoller is a principal analyst in Ovum Telecom’s Consumer Practice, covering communications, content, applications, and social media.

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