Facebook's Ad Problems Add Up (Part 2)
Brandy is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
(Read Part 1)
“Mobile” has been a buzzword among Facebook (NASDAQ: FB) insiders and supporters. The suggestion is that the mobile sphere has potential for large future profits since Facebook has only just started monetizing that sector. While it’s certainly possible that FB will eventually come up with a winning mobile strategy, it hasn’t hit upon it quite yet.
A solution needs to come and it needs to come fast. The site’s mobile-only user base is growing rapidly. In the second quarter, 102 million monthly active users (MAU) accessed via mobile-only, a 23% increase from the prior quarter. General mobile users, including those using a mobile device and computer, totaled 543 million (up 11% on the quarter, 67% on the year). Total MAUs – including general mobile and computer-only users – totaled 955 million, a mere 6% increase from the prior quarter.
Current Strategy: Sponsored Stories
The sole monetization method for mobile advertising is Sponsored Stories, an in-feed ad type that shows a product or service “liked” by a Facebook friend. The ads are more organic looking since they don’t appear to be ads at all but rather the sharing of an item or service between friends. The Stories have existed for months in the web version but mobile ads only started rolling out in June. CEO Mark Zuckerberg said on the conference call that Stories (web and mobile) earn $1 billion a day, with half of that coming from mobile.
There are legal and logistical issues with the Stories method. A recent class action lawsuit victory will require Facebook to update its Terms of Service and Stories procedures so that users have the chance to opt out of some (or all) of the actions that might result in Stories generated with that person’s image. If a large portion of users opt-out completely, it could effectively cripple the number of Stories that can be displayed.
There’s also a question of Stories visibility. Web users can see the ads rather easily but smartphone users have a smaller screen where it’s easier for ads to get lost below the metaphorical fold. A report from EyeTrackShop (an analytic startup focusing on audience attention) detailed how much different segments of users were subjected to Stories ads and the recall level of those users. The company found that smartphone users noticed the ads 6% less than web using counterparts. Smartphone users also spent 14% less time looking at the ads and remembered the ads 20% less than web users. Tablet users, however, saw 18% more ads than web users and spent 29% time looking with a comparable recall.
While the tablet news is certainly good, the smartphone data shows that the current model isn’t working for that type of device.
I mentioned in Part 1 that while the majority of FB's revenues come from advertising, a large chunk of the remainder comes from in-game purchases made in Zynga (NASDAQ: ZNGA) titles. Could Facebook get some mobile revenue padding from that direction?
It's very unlikely considering Zynga's own monetization issues, which include a revenue decrease partnered with a usership increase. If online gambling is legalized, Zynga could help boost FB's overall revenues but the mobile sector likely wouldn't see as much of a boost as the web version.
Is FB’s Mobile Strategy Worth “Like”-ing?
Facebook could still come up with an advertising strategy that works better on smartphones than what’s currently in place. But there would be a long, under-monetized period before that method could present itself and prove effective. Investor confidence isn’t likely to hold out for an ad hero, particularly with lockup expirations coming around the bend.
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