Facebook’s Fluid Shift to Mobile Leaves Competitors in the Dust

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

It looks like Facebook (NASDAQ: FB) might make it after all. After its over-hyped IPO flopped last year, plunging from its initial price of $38 in May to $17.55 by September, many analysts painted a bleak picture for Facebook’s future. They argued that the social network would not be able to properly monetize its mobile user base, and its popularity would fizzle out, just as MySpace did several years ago. Yet CEO Mark Zuckerberg proved all those naysayers wrong this quarter.

A very “likeable” second quarter

For its second quarter, Facebook’s adjusted earnings rose 58% to $0.19 per share and topped the consensus estimate by five cents. Revenue rose 53% to $1.81 billion, also exceeding the $1.62 billion that analysts had expected.

Most of those gains were attributed to Zuckerberg’s heavy investments in mobile advertising last year. Those enhancements boosted the company’s mobile revenue 61% year-on-year to $655.6 million, and mobile now accounts for 41% of the company’s total advertising revenue.

At this rate, mobile revenue will soon comprise over half of Facebook’s advertising revenue, which will keep the company on track to claim 14.9% of the global mobile advertising market by the end of fiscal 2013, up from 5.4% in 2012, according to research firm eMarketer. Although that would be an impressive year-on-year gain, Facebook will still trail Google (NASDAQ: GOOG), which is forecast to claim 52% of the market this year.

Total users and micro-transactions rise

Facebook’s total users rose to 1.15 billion, up from 1.11 billion a year ago. Its mobile user base grew 51% year-on-year to 819 million, thanks to the rising adoption of smartphones and tablets. In addition, 61% of its total users accessed the social network daily, even when the company itself had predicted that its number of daily users would eventually flatten out or decline.

Last but not least, revenue from online payments from virtual goods and gifts rose 11% to $214 million, thanks to the popularity of Zynga’s Farmville 2 and King’s Candy Crush Saga. Facebook takes a 30% cut of transactions from games played within its site.

Facebook’s strategic hits outnumber the misses

Over the past year, Facebook revealed a number of ambitious strategies to clarify its long-term growth strategy. Facebook Home, its ambitious Android replacement launcher, was intended to take over Google Android phones by making Facebook a replacement operating system skin. The idea fell apart after users criticized its overbearing design. HTC bore the brunt of the failure, and was forced to pull its “Facebook Phone,” the HTC First, off the market after only a month.

However, various updates to its smartphone apps, a new video feature for Instagram, and the addition of “stickers” to rival mobile chat apps Line and Viber, were all smart moves. In addition, Facebook’s Graph Search feature, which allows users and advertisers to filter users by geographic location and interests, holds a lot of potential for optimizing targeted advertising.

Facebook’s appeal to advertisers is rooted in its ability to allow advertisers to “friend” users, and to use “likes” to fuel viral promotions. Facebook is also focusing on simplifying the process by reducing its 27 ad units by half to make ad purchases more efficient. This strategy is clearly appealing, since it even won back General Motors in April, after the automaker abandoned the social network last May.

Declining CPC casts doubt on Google’s mobile future

Facebook’s bullish earnings were a stark contrast to Google and Yahoo! (NASDAQ: YHOO), which both struggled with boosting mobile revenue last quarter.

Both Google and Yahoo! have struggled with balancing the cost-per-click (CPC) of PC ads against mobile ads. The core dilemma is that the CPC for mobile ads is generally lower than PC ones, which has hurt companies that rely more on higher-priced PC ads. In addition, the PC market is shrinking rapidly, with global shipments plunging another 11% year-on-year in the second quarter.

Mobile search ads currently account for 32.5% of Google’s top-line. To remedy this imbalance, Google introduced a new AdWords program called Enhanced Campaigns, which bundles desktop and mobile ads together in a single package. Advertisers must now purchase this single package, which is aimed at balancing out its CPC, which declined 6% year-on-year last quarter, compared to a 4% drop a year ago.

By comparison, Facebook uses a bid-based model, which allows advertisers to choose a CPC or CPM (cost per thousand impressions) system. Due to the wide variety of prices seen in CPC and CPM on Facebook, it is more reliable to simply look at the overall growth of its advertising revenue.

Yahoo! is being crushed by two titans

Yahoo!, on the other hand, is getting squeezed out of the mobile market by Facebook and Google, which together account for more than 70% of global mobile revenue. Although Yahoo! recently announced that it has 340 million monthly mobile users, the company has only generated $125 million in mobile revenue annually from those users, accounting for a meager 2.5% of its 2012 revenue. Yahoo!’s overall CPC also fared worse than Google, dropping 8% last quarter.

However, under Marissa Mayer, Yahoo! has become the market’s favorite tech underdog, and its acquisition of Tumblr has given it a valuable weapon to compete socially against Facebook and Google+. However, Yahoo!’s revenue declined 7% last quarter - a slide that is likely to continue unless it reverses the 11% decline in display advertising revenue that it reported last quarter and starts producing mobile revenue.

The Foolish Bottom Line

By all accounts, this was the blowout quarter that Facebook investors have been waiting for. Zuckerberg proved that he knew which areas the company needed to invest in, and those initiatives have paid off.

Facebook also has the advantage of youth over Google and Yahoo! - while those two older companies need to reorganize their business models to focus more on mobile users, Facebook is designed from the ground up to feed on and monetize social connections, which will only increase exponentially with the rising reliance on mobile devices.  

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Leo Sun owns shares of Facebook. The Motley Fool recommends Facebook, Google, and Yahoo!. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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