Facebook Dangerously Lags Competition

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Congratulations, Facebook (NASDAQ: FB), for convincing one-seventh of the world to use your service.  Now the question is: can you monetize your efforts?

According to The Wall Street Journal, Facebook would rank as the third largest country in the world, behind China and India, and just above the U.S.  However, its GDP would be ranked far lower – 156th – sandwiched between Fiji and Barbados.

<img src="/media/images/user_13210/10-11-12-fb-and-yhoo-must-up-unique-user-rev-now_large.jpg" />

Source: The Wall Street Journal

In the print edition of WSJ, this same article has a slightly different chart, one that compares revenue per unique user for Facebook, Yahoo!, Baidu (NASDAQ: BIDU), and Google (NASDAQ: GOOG).  The results are as follows:

<table> <tbody> <tr> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>Revenue Per Unique Visitor</strong></p> </td> </tr> <tr> <td> <p>Google</p> </td> <td> <p>$9.46</p> </td> </tr> <tr> <td> <p>Baidu</p> </td> <td> <p>$3.25</p> </td> </tr> <tr> <td> <p>Yahoo</p> </td> <td> <p>$1.76</p> </td> </tr> <tr> <td> <p>Facebook</p> </td> <td> <p>$1.42</p> </td> </tr> </tbody> </table>

The data is clear: to be on par with its peers, Facebook and Yahoo! must boost their revenue.

The Winner’s Circle

Not surprisingly, Google is far and away the clear winner – likely because it has the “stickiest” products.  In Google’s 2012 Update from the CEO, CEO Larry Page explained that Gmail has more than 350 million users, and that YouTube has more than 800 million monthly users, who upload over one hour of video each second.

Also, with Google Docs, Patents, and Books, Google has the opportunity to grab users’ attention and show them web search, mobile, and display ads.  It leads all companies in each of those ad categories.

Like Google, Baidu is strong in internet search.  Baidu’s Chinese and Japanese search engines are strong, and the company has been successful selling ads to both small and midsize businesses, as well large corporations and multinational organizations.  Moreover, Baidu has jumped into the mobile space, entering a small market that will grow with time.  In short, Google and Baidu have done well.

In Need of Improvement

Yahoo! can improve its revenues in a number of ways.  First, the company needs to pull new users to its Yahoo Mail product, then find ways to convince users to stay.  Yahoo Mail works well, but the company will have a hard time stealing users away from Google.  It must develop its own set of comparable software products – like a fully integrated, intuitive version of Google Docs – to compete.

In search, Yahoo! must continue to refine its search engine, which uses Microsoft’s Bing.  The search engine has made huge strides in search relevance – I recommend looking at the results of its blind test with Google – now the company needs to get its search engine in front of more people and continue to build relevance.

Finally, Yahoo! can profit from new advertisers on the Bing advertising network.  Google has banned a great number of advertising accounts over the years, and Yahoo! has an opportunity to pick up those accounts.  Yahoo! can boost its search revenue by increasing search competition, and the prices that advertisers will pay per ad.

For Facebook, increasing revenues is far more complicated than simply raising users’ experience – it must find additional ways to monetize its user base.  First, Facebook must find a way to raise profits from users who use the service on their mobile devices.  Small screen sizes prevent Facebook from showing numerous ads, so it must look to alternatives, like full-screen ads or short videos.

With full-screen ads, Facebook could put up an ad after every 10 or 15 pictures a user scrolls through, similar to the way Pandora structures its ads in between songs.  Like a full-screen ad, Facebook could play a short 10-second video before loading a page, similar to YouTube.

As for testing an approximate $7 charge for its users who want to promote a post, I think that Facebook is on the right track.  Monetizing its users directly is a model that is working for LinkedIn, and Facebook is logically testing user appetite.

Bound to Facebook

Facebook is not alone – Zynga (NASDAQ: ZNGA) is having trouble remaining profitable.  Zynga makes money when its gamers buy virtual goods in its games, and the company has struggled as users jump from PC-based games on Facebook to mobile games.  The flurry of users has sent Zynga’s stock price down over 75% since its IPO.

Zynga’s success goes hand-in-hand with Facebook’s, as it depends on Facebook gamers to make it profitable.  Since its revenue is declining, I wonder if Zynga would have success running ads on its platform.  For example, could it pivot from primarily selling virtual goods to also selling advertising?  Likely Zynga could niche target people across a spectrum of ages, because of its user data coupled with a variety of games.

In all, however, it is clear that Google and Baidu are ruling the online space, leaving Yahoo! and Facebook – and as a result, gaming firm Zynga – in the dust.  To catch up to its peers, Yahoo! and Facebook need to increase the user experience and monetize users, respectively. 

Catching Google may never be possible, but the tech giants can at least trim Google’s lead.

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ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of Baidu, Facebook, and Google and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Baidu, Facebook, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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