Will Facebook's frailty doom the NBN?

Last week Facebook released its first results as a listed company. Since then its shares have fallen more than 20 per cent and are now about 40 per cent below their first-day close. It's got a lot to do with mobility.

At face value, so to speak, the results weren't all that bad. Second quarter revenues were up from $US895 million to $US1.2 billion and (on a non-GAAP basis) earnings were up from $US477 million to $US515 million. The number of monthly active users was up 29 per cent to 955 million.

What disturbed the markets, however, was a significant compression of the group's operating margin, from 53 cents in the dollar a year ago to 43 cents.

Facebook's problem is that while it is continuing to attract users it is extracting less and less, on average, from them.

The reason for that is that the biggest increase within its audience is from users accessing its site via their mobile devices. Average mobile monthly users increased 67 per cent to 543 million. And with Facebook itself acknowledging in its prospectus that it generates very little revenue from its mobile application and has yet to work out how to monetise that usage it is little wonder the market has taken fright.

Facebook isn't alone. The much-vaunted social media revolution is continuing but as it has shifted to mobile platforms the issue hasn't been how to attract new users but how to make money off them. Wireless devices make poor advertising platforms.

The surge in wireless broadband is a global phenomenon, with far more wireless broadband services in operation than fixed line broadband services. In Australia there are almost exactly three times as many wireless broadband connections as fixed broadband connections and the take-up of wireless broadband penetration continues to grow.

It will, incidentally, be interesting to see whether the new NBN Co business plan scheduled to be released this week has changed any assumptions about fixed to mobile substitution.

Its view, and indeed the standard industry view, has been that wireless and fixed line broadband are complementary rather than competing technologies. To a degree, perhaps to a significant degree, that is true but the diverging growth trends suggest that a significant and growing proportion of the population is quite happy to rely on wireless.

Indeed, the government-commissioned review of the NBN by Greenhill Caliburn specifically warned that the increasing popularity of wireless and the willingness of consumers to sacrifice speed for mobility represented a potential threat to the economics of the NBN.

Today's announcement that Optus has started to switch on its 4G network and upgraded more than 1000 sites for 3G-plus services, which follows Telstra's launch of its 4G, or long term evolution (LTE), services late last year, is an indication of the changing telecommunications landscape and the potential for an acceleration of that existing trend towards substitution.

Telstra's 4G network already covers about 40 per cent of the population while Optus, which currently only offers the service in Sydney and Perth, plans a national roll-out next year.

Optus said that its 4G trial network had achieved consistent per user speeds in a range of between 25 Mbps and 87 Mbps. In other words, as the industry rolls out 4G services, it will be able to offer consistent speeds that are faster than the 12 Mbps or so delivered by ADSL 2 services, which happens to be the entry-level product that will be offered by the national broadband network.

Given that quite a significant proportion of households with fixed line broadband have relatively low usage rates, faster download speeds on mobile devices and the lower costs of delivering data over 4G networks relative to 3G networks for the carriers means that Telstra, Optus and, perhaps, Vodafone, ought to be able to offer very competitive wireless alternatives to the NBN for low-level users. Plus, of course, there's the massive advantage of mobility.

NBN Co wanted to prevent Telstra and Optus from promoting wireless as a substitute for its fibre services but was prevented from doing so by the Australian Competition and Consumer Commission, which viewed the restrictions as anti-competitive.

NBN Co would be acutely aware that it is in Telstra and Optus' interests to promote their own infrastructure rather than pay for access to the NBN and that it has handed them some very large cheques – in Telstra's case more than $11 billion in net present value terms, with Optus getting $800 million to shut down its HFC network. Those war chests could be used to promote their wireless services through aggressive handset subsidies.

The difficulties Facebook and its peers are having monetising their vast user bases as the majority of them shift their usage to wireless devices isn't going to be confined to social media but will impact any service that involves advertising – and fixed line broadband service providers reliant on consumers for their volume.