Advertising is Dead: Why the Future of Facebook is M-Commerce

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

Eduardo Saverin: Hey, you know what? Settle an argument for us. I say it's time to start making money from TheFacebook, but Mark doesn't want to advertise. Who's right?

Sean Parker: Um...neither of you yet. TheFacebook is cool that's what it's got going for it.

Mark Zuckerberg: Yeah.

Sean Parker: You don't want to ruin it with ads because ads aren't cool.

Mark Zuckerberg: Exactly.

                                                                         -The Social Network, 2010



Question: What's the quickest way to kill a social network?

Answer: Advertise it to death.

Advertising users to death is the third rail of Internet success. Touch it and you die. That's why internet radio giant Pandora spaces out its ads to match terrestrial radio, instead of yielding to industry pressure to increase the number of ads per song rotation. It's why Hulu goes out of its way to allow viewers the option of front-loading all the advertisements into one long endorsement. Ad-bombing caused a user revolt on Myspace and put a bullet in Yahoo's brand that one CEO after another have struggled to remove.

Death-by-advertising is the reason that advertising isn't the future of Facebook. 

Part of Facebook's (NASDAQ: FB) enduring appeal for investors has been the site's “stickiness” – the amount of time that users spend on the Facebook web site in comparison to other web sites. However, assuming the continuation of an existing trend can be hazardous to your portfolio when it comes to investing in Web-based companies. Facebook may be as sticky as a San Francisco glue factory after a 7.8 earthquake, but so were Myspace, webrings, and chat rooms. In terms of longevity, popular web sites have more in common with hit TV sitcoms than they do with the networks they air on.

The reason that social networking of all stripes tends to grow so quickly is due to something called Network Effect: The more people use it, the more useful it becomes. However, the opposite can also happen: one user leaves, followed by another, and another. This is known as Inverse Network Effect: The more you use it, the less useful it becomes. When Myspace's management sought to boost revenue by ad-bombing its users, it worked - for about two months. Then Myspace collapsed, shedding angry and bitter users all the way down.   

That's Inverse Network Effect. 

The other big draw for long-term investors is the number of Facebook's users, which number about 955 million (825-850 million with bots and duplicate accounts weeded out), 81% of which live outside of the U.S. and Canada. But while Facebook users may outnumber all the people in the Western Hemisphere, most of them are either lower income, third world or otherwise out of the market. As for mobile, you can only fit so many ads on a 3.5 or 4 inch screen, and when is the last time you clicked on one? 

Consider PayPal: With 113.2 million active accounts as of last quarter, the PayPal (EBAY) division has increased revenues by 26% year-over-year. PayPal's total payment volume (TPV) is $34.5 billion. Out of that figure, $4 billion is due entirely to mobile payments, a 500% increase in just one year. Compare that with eBay's auction division, which has been treading water for years. Paypal's payment services are the key to eBay's growth, and mobile payments are the key to PayPal's growth.

If 113.2 million active users sounds impressive, how about the 400 million+ Facebook users that would be comfortable using their credit card on Facebook? According to a survey conducted by Harris Interactive in 2011, over 40% of Facebook users aged 20-33 in the United States and Great Britain said they wish there were more occasions to shop within Facebook. 26% of Facebook users aged 34-46 agreed, along with 16% of Baby Boomers. By converting to a mobile payments platform, Facebook would be the automatic odds-on favorite to capture the lion's share of the projected $170 billion dollar mobile payments market.

Facebook Gifts is a shot across the bow of e-tailers like Amazon, eBay and Etsy. In May, Facebook acquired Karma, a social based gift giving platform. Karma's infrastructure has since been rescaled to handle Facebook's 550 million daily users. The gifts portion of the mobile payments market is huge, about $38 billion annually. Over a hundred companies, from Starbucks to Magnolia Bakery and 1-800-Flowers have already signed up. 

Will 'Gifts' be enough to turn Facebook around? Not on its own. While Gifts, along with Facebook's “frictionless payments" partnership with Bango are definitely steps in the right direction, Facebook needs to roll out its own wallet on a network-wide scale in order to head off competition as mobile payments hit their stride. Apple's Passbook is one toe in the water for Cupertino, but the real competition is technology giant Google (NASDAQ: GOOG) which is pushing hard for its own electronic payment solution, known as “Google Wallet."  

The Achilles heel for Google Wallet is its reliance on NFC (near-field communication) to make purchases. NFC isn't expected to achieve widespread brick-and-mortar option until 2016; however, the number of NFC-capable mobile devices that use it are growing every month: The Samsung Galaxy II and III series phones, along with HTC One X, Google Nexus, Motorola SLVR L7 and Wii U GamePad are all NFC enabled. (We're still waiting on Apple.)

In reality, Facebook doesn't have until 2016. Square is already available as a payment method in over 7,000 Starbucks locations. People all over the world are already purchasing their boarding passes, concert tickets and Walgreen's prescriptions using Apple's Passbook. Facebook has a narrow window of opportunity in which to become a pivotal player in the mobile payments market. The question is whether or not Facebook will seize that opportunity in time.  


FatalX has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and Google and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend eBay, 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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