2 Challenges Facebook Must Overcome
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 for depression 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 hoodie 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 wants to make.
Now the website we can't live without has made 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.
One of the early founders, Peter Theil, has sold off his stake in the company spurring rumors of lost confidence. (Or maybe he just wanted to cash out his $396 million?)
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. 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 small 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 tune them out. So what's an ad revenue based business to do?
Facebook faces the ultimate challenge- to do what no other publicly-traded company has done before- succeed as an ad-based publicly-traded company.
Facebook needs more revenue, plain and simple. And it needs to make that revenue some place other than ads. Has there been any one successful ad-revenue, web-based, publicly-traded company (with the exception of Google (NASDAQ: GOOG)? For why, read on.) Back in its heyday, when AOL (NYSE: AOL) was still subscriber based, it flourished. Yahoo (NASDAQ: YHOO) is not the company it once was [when it had more paid subscriber services, and less ads] either. LinkedIn (LNKD) is currently successful, but it enjoys the benefits of subscriptions.
Will Facebook find other ways to earn revenue without having to irritate users with more invasive ads? Could it follow the LinkedIn model with premium paid memberships? 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 is actually rolling out a different idea 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.
Google is the exception to the apparent curse of ad revenue web based businesses. While all other companies, AOL, Facebook, Yahoo, etc., are trying to pay for their primary services with ad revenue, Google has the advantage. When a user goes to Google they are there for the benefits that come with the ads that bolster the search engine. Google's primary business offering is ads. No other company can say that. Google started with ads and built from there. All other businesses started with a primary offering and resorted to ads to monetize.
Meanwhile, Facebook also must do a better job with mobile advertising. Right now, it is virtually non-existent. CEO Mark Zuckerberg has stated 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.”
Google and Yahoo have been doing it for years. Google CEO Larry Page told investors in April that the 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.”
But here's the catch. Facebook 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*.
Facebook stands apart as the first real social media website, with no real product, offering, or service, other than a place for users to interact. It will always face the challenge of putting a price on social interaction. But it is the creativity and ingenuity seen at Facebook that gives one hope to think that they may be the first company to overcome the apparent kiss of death that other ad revenue businesses have faced after going public.
*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? How many mobile users intentionally click on ads?
ErinAnnie has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and Google. Motley Fool newsletter services recommend Facebook, Google, and Yahoo!. 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.