Facebook isn't a Lost Cause
Erin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Facebook (NASDAQ: FB) has been doomed ever since its historic initial public offering. Did the social media giant ever stand a chance? Was there ever the remote possibility of living up to the hoodied hype?
The social network behemoth has lost about $34 billion in market value since the IPO and flameout in May. The company now has another historic label on its stock- no other company has lost so much, so fast. And after the first quarterly earnings were reported, the company saw its biggest one-day loss ($16 billion) on record. Not the kind of history anyone ever wanted to make.
Now the website we can't live without is making even more news:
-Senior executives Katie Mitic and Ethan Beard announced their plans to depart Facebook to pursue other opportunities.
-The State of California's fiscal analyst is concerned that the state will lose “hundreds of millions of dollars” in revenue expected from taxes on capital gains.
-The company admitted it believes there are now more than 83 million illegitimate accounts (8.7% of all 955 million active accounts) on the social network.
-Accusations are flying that Facebook ad clicks are coming from bots and not real users. For a website that makes its primary revenue in ad sales, those are fierce accusations.
What can Facebook do to win back the love? Is there any hope left?
Here's the thing, Facebook has lost the bloom off the rose with investors, but it is still attracting users (Just last week my best friend's mother joined the site. Why? So she “could keep up with her granddaughter.”). The entire world has not yet been assimilated to Facebook. There are still new users joining every day. Facebook still has more users than some countries have citizens (955 million monthly active users at the end of June 2012, 552 million daily active users as of June 2012). All those users are sitting targets- if the company wanted to have a shot at them.
Advertising revenue is 84% of the company's overall income. That would be $992 million for the quarter, an increase of 28% over the year previous. Or roughly $1.04 per active monthly user. But users are disenchanted with ads. We hate them. We are tired of them, and we have learned to ignore them.
So what's an ad revenue based business to do?
In the case of Facebook, it has to do a better job with mobile advertising. Right now, it is virtually non-existent. CEO Mark Zuckerberg said mobile is a key area of focus for the company. Mobile users, who make up more than half of the membership, are more active than counterparts who use only the desktop version.
“Mobile is a huge opportunity for Facebook,” Zuckerberg said. “Our goal is to connect everyone in the world. And over the next five years, we expect 4 or 5 billion people to have smartphones. That’s more than twice as many people as have computers today.”
But here's the catch. The company has to harness mobile advertising, without alienating its 543 million monthly active mobile users. Mobile users are the ones who are bored standing in line, and check Facebook on their phones, or while commuting on the bus, and let's face it, stuck in traffic. Mobile activity will drop if the ads take up too much time, or make it too difficult to see the news feed.
AdParlor, a service for marketers, claims that early results on mobile ads show click-thru rates are 15 times higher for mobile users*.
Google (NASDAQ: GOOG) CEO Larry Page told investors in April that his company is “seeing a hugely positive revenue impact from mobile advertising, which grew to a run rate of over $2.5 billion by the third quarter of 2011 -- two and a half times more than at the same point in 2010.” Definitely a target for Facebook to try to hit.
This brings me to my next point. Facebook needs even more ad revenue, plain and simple. That is where and how the site makes money. All of the rumors of Facebook phones or acquisitions aside, what Facebook needs is more revenue, and its revenue comes from ads.
The company is actually rolling out a new moneymaker already. Instead of allowing users the opportunity to pay for fewer advertisements, it now allows companies the chance to pay to make sure their posts are seen by even more users. Apparently too many users have figured out how to use AdBlock, or have just tuned out ads all together.
But as you can see, not all users are happy about this new type of advertisement.
The real challenge ahead of Facebook is to please investors with more revenue from ads while not alienating actual users with ads. (A challenge for nearly all ad revenue based web businesses.) Can it be done?
Facebook also has to find a way to keep the site fresh for users, or risk losing them. It isn't just about figuring out how to make money off of users, but how to keep users happy. One step forward is a new feature called “Save for Later.”
According to different reports, users can save posts by tapping and holding a message to save it for later. A popup will appear with the option to save. Posts will be saved in a folder on the sidebar. (All stories will be private, so other users will not know when their posts have been saved.)
But does it have to? Can Facebook find other ways to make earn revenue other than irritate users with more invasive ads? What about premium paid memberships (a model that is working for LinkedIn (NYSE: LNKD))? Would users be willing to pay an annual subscription rate if it meant not having to see ads or unwanted applications? (It should be noted that while LinkedIn does offer a paid subscription, users still see ads.)
Facebook has its work cut out for it. But investors need not fear. The site may not be living up to the hype, but it is far from a hopeless cause. While the stock is low may just be the time to get in. There is no reason to think that Facebook won't continue to grow and keep up with users' demands.
*This social media marketer and user wants to know one important detail about that return rate- how many of those clicks were intentional versus accidental? Personally, I know that every single mobile ad I have ever clicked on was an accident. I have never clicked on an ad from my phone on purpose. And the more ads I am forced to look at from my phone, when obviously I was attempting to access something else (has anyone, ever, in the history of the internet, or even printed goods, opened a website or newspaper just to look at the ads?), the less likely I am to return to that site or app.
ErinAnnie has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook, Google, and LinkedIn. Motley Fool newsletter services recommend Facebook, Google, and LinkedIn. 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.