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Facebook must monetize mobile or risk shrinking revenues

While Facebook sees mobile as critical to its future growth, the growing number of people accessing the social network via mobile devices could negatively impact its advertising revenue unless it is able to begin monetizing its mobile usage.

In a filing this week with Securities and Exchange Commission for an initial public offering, Facebook said it generated 85 percent of its revenue last year from advertising that was delivered to PC users. However, as the number of Facebook users who access the social network from mobile devices grows, sometimes at the expense of PC use, advertising revenues could decline unless Facebook can begin to monetize mobile.

?They haven?t monetized mobile at all, but I would not necessarily second guess their timing because I do believe that is still coming ? the fact that it has not happened yet is for good reason,? said Michael Boland, senior analyst and program director at the Kelsey Group, San Francisco.

?They are still in the process of developing their mobile use case and apps - they only recently launched an iPad app,? he said. ?That has to be solidified before ad support comes into the picture, and Facebook has healthy cash flows from online ads and payments to afford this experimentation without pressure to jump at a mobile monetization strategy prematurely.

?But it will come this year, and it will likely be in the form of sponsored stories, rather than display ads, as the latter could be too obtrusive to the mobile form factor.?

More mobile users
Facebook has more than 425 million monthly active users who used its mobile products in December 2011 compared with 845 million overall monthly active users. The company expects that the rate of growth in mobile users will continue to exceed the growth rate for overall active users for the foreseeable future.

The growth in Facebook?s mobile usage in 2011 was driven by growing mobile penetration and several enhancements Facebook made to its mobile products in 2011.

?Facebook now has 845 million active users and 425 million of those are active mobile users,? Mr. Boland said. ?That?s about half, but it was closer to 40 percent last year, so it?s clearly growing. 

?In addition to natural growth of smartphones in developed nations, this could be accelerated by Facebook?s growth potential in developing countries that have leapfrogged fixed line telephony in favor of mobile communications,? he said.

In the SEC filing, Facebook said its advertising revenue increased 69 percent in 2011 for a total of $3.2 billion and accounted for 85 percent of its overall revenue. The company also said it believes it has future monetization opportunities in mobile such as through the inclusion of sponsored stories in users? mobile news feeds.

The money raised from the IPO could help Facebook make this a reality.

?One advertising opportunity on mobile will be Facebook?s Featured ads in their consumers? mobile newsfeeds,? said Dave Martin, senior vice president at agency Ignited, El Segundo, CA. ?These ads do not look much like advertising because they generally represent a user?s organic interaction with a brand they Like. 

?If consumers continue to respond well to the online newsfeed ads, it will not be long before we see them on handsets,? he said. ?This is going to require a lot of tech development which could be funded by the IPO.?

Search and find
Another way Facebook could monetize mobile is by improving its search capabilities, which would enable it to start serving relevant ads to consumers based on their search queries on mobile.

Facebook has the potential to make search results more relevant by harnessing the social data

Facebook already has a lot on its users. For example, a user searching for a restaurant could see the ones that were most discussed by the user?s friends.

?In the advertising bucket, Facebook is likely to start by improving their search capabilities and serving paid ads against search results - both online and mobile,? Mr. Martin said.

?Facebook?s search has been a weak spot across their products for years, and search is the biggest reason consumers migrate out of the Facebook ecosystem,? he said. ?If Facebook can use their investor cash to build a better search tool, it will give consumers a reason to stay on Facebook even more than they are now.?

In the SEC filing, Facebook said it is investing in a variety of ways to build its mobile presence, including developing mobile products and experiences, working with operators, manufacturers, operating system providers and developers to improve the Facebook experience on mobile devices. The company said that mobile usage is critical to maintaining user growth and engagement over the long term.

?As a consistent top-ten most downloaded app on iPhone and Android, Facebook already has a massive mobile footprint,? Mr. Martin said.  ?But they have yet to monetize all that traffic ? they aren?t showing ads and they?re giving away the app for free.

?It?s unlikely that Facebook will try to compete at an operating system or hardware level with Google or Apple, so the monetization strategy must come out of some combination of advertising and data,? he said.

Final Take
Chantal Tode is associate editor on Mobile Marketer, New York