Funny thing about the 425 million monthly users of Facebook on mobile devices: they don’t monetize well, and Facebook itself admits it is unsure when and how they will. In all of the press attention to the size and overall prospects for Facebook’s new public form, the elephant in the room that seemed to elude notice was sitting in every analyst’s pocket. In fact, in yesterday’s SEC filing for its proposed initial public offering, social network and mobile Goliath Facebook underscores the prospect that its massive popularity on devices could pose a business risk. Do a search of “mobile” in the filing with the SEC and see what you get.
In two separate paragraphs under the requisite “Risk Factors” litany of things that might go awry in the business plan, the company admits that its strength in mobile could prove a weakness if people abandon the desktop. “Growth in use of Facebook through our mobile products, where we do not currently display ads, as a substitute for use on personal computers may negatively affect our revenue and financial results,” the filing states.
Facebook reveals that it is touching 425 million monthly active users at this point, meaning that about half of its members are accessing the network regularly on devices. The company says it fully expects the rate of growth in mobile access to exceed overall growth in the member base. “Although the substantial majority of our mobile users also access and engage with Facebook on personal computers where we display advertising, our users could decide to increasingly access our products primarily through mobile devices. We do not currently directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven.”
Until now Facebook has not run its ads into the mobile stream via its apps or mobile sites. Nor has the company been forthcoming in laying out its mobile monetization strategy. At the very least, Facebook appears to be laying down a clear challenge to itself to make this platform work or suffer real damage.
To be sure, virtually every aspect of the Facebook business plan has stated risks, and it is the function of the “Risk Factors” section of an IPO filing to call out every contingency. But risks to other areas of the business, like the core ad product, currently have solutions in place that are generating business. The absence of a mobile monetization strategy is an obvious hole in the Facebook strategy.
Further on in Facebook’s filing we see how the company’s need for a mobile strategy is even more pressing as it expands worldwide. Mobile platforms are responsible for much of its growth in daily active users. The company says that mobile is critical to increasing its engagement with users and its ability to grow the base especially in emerging markets.
Some hint of future monetization comes when the filing reiterates the business risk of members replacing desktop access with mobile access, which Facebook anticipates to be the case. “The number of ads that we deliver to users and our revenue may be negatively affected unless and until we include ads or sponsored stories on our mobile apps and mobile website.” To channel our recent President, the implications of this statement depends on what your definition of “or” is.
The implication is that Facebook may still be undecided about how it plans to monetize the mobile channel, whether through migrating its current ads or leveraging new models like brand “stories.” In other words, Facebook is in the same bind that earlier mobile social networks have been in. They enjoy massive inventory on a medium where people are even more reticent than they are on the desktop to click away from their core social experience in order to pursue an advertiser’s message.
For almost a decade, “community” areas of most Web sites were regarded as an ad effectiveness hole. Tossing an intrusive ad into a social exchange online is roughly the same as putting a commercial in the middle of a phone call. People are focused on one another, not on an interloping brand. Some communities tried to fix this with broader community section sponsorships that kept a single brand ever-evident.
In mobile we saw companies like MocoSpace ratchet through models that included brand profile pages. Mobile dating sites would slip interstitials into the pile of profiles that mobile users would flip through as they triaged prospects to contact later. Some of these networks like MocoPay and airG have settled on virtual currency and gaming as monetization strategies. Certainly that is one strong possibility for Facebook as it brings its apps into the mobile space. Curiously, I couldn’t find any mention of virtual currency attached to mobile platforms in the IPO filing.
Later in the IPO filing, the company addresses the mobile advertising opportunity directly, providing an even more explicit indication of where it is leaning:“We believe that we may have potential future monetization opportunities such as the inclusion of sponsored stories in users’ mobile News Feeds.” In other words, the answer is Twitter’s answer.
So from all indications in the IPO, we will be seeing ads interspaced with the notes you share with family and friends. Arguably, Facebook isn’t Twitter. Twitter is more of a broadcasting medium, while Facebook relies on more defined and controlled circles of friends. There is a level of intimacy here that Twitter does not seem to have. Ads in feeds just doesn’t seem to me to be the kind of sophisticated leadership position one might want from a $100 billion dollar company that has as many mobile users as just about any entity on the planet. Let’s hope someone in Zuckerberg’s dorm room is thinking harder about this issue than it appears.