Facebook’s Next Money Minting Machine!

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

Facebook Inc. (NASDAQ: FB) has gone through various ups and down since its inception in the stock market. Investors have raised a lot of questions on its sustainability in the near future and consider the stock to be heavily overpriced. This is the reason that the stock has dropped to the low $20’s from its initial price of $38, a drop of around 35-37 percent.

The performance of this stock is heavily dependent on its ability to continue generating revenue with its existing model or by introducing a completely new one. One major problem that is quite easily visible is the non-disclosure of information and facts by its CEO Mark Zuckerberg. Before the company got listed in the stock market, nobody raised any questions on how the financials of the company are performing. But since its listing, Mark Zuckerberg is facing a torrid time in convincing investors about potential revenue growth. They have the largest database in the social networking world with 955 million users and the numbers are growing day by day. But here's the big question!

How to Mint Money From This Database?

Facebook is currently targeting two new ways of generating revenue through Ads. One is through its web application for desktops and the other is through its mobile application. But one might ask, the web application is already in place, the advertisements are already being displayed, then what is so different about this new source?

Well, Facebook has been selling ads the old fashioned way for quite some time now. Advertisers were given a bunch of filters and based on their selection the data was segregated for them. Then the advertisers displayed their ads to these specific set of users. This helped Facebook in generating around $5 million in terms of ad revenue.

The figures are quite intriguing but they do not depict the fact that they could have potentially generated more revenue by implementing another model. Here the customers visit a particular product site say, Nike, for instance, to purchase a shoe. However the sale does not materialize because of some reason. The information is getting stored on their browser via something called a “cookie.” The next time the same user pays a visit to a different website, they will see the ad of the same shoe getting displayed there. This will generate more curiosity for him/her to check it out again. The more number of times he/she keeps checking it out the more chances it will have, to materialize into a sale. This gives advertisers a better conversion rate and thus they are willing to pay more.

If utilized properly, this revenue model for advertisements could help Facebook improve its earning by three folds which would certainly please its investors. Google (NASDAQ: GOOG) its biggest competitor in display ads has already shown the potential revenue from this source. They will possibly takeover Facebook, with a market share of around 15.4% by the end of the year 2012 (as per EMarketer). The report also depicts that they will have the highest growth rate in the next two years. Let’s take a look at the growth of revenue ads for different online companies:

<img src="/media/images/user_13211/image_18_large.JPG" />

*Data Courtsey - www.eMarketer.com

They are already the market leader in the search and mobile ads, possibly taking over Facebook in display ad by the end of this year. They are one of the most innovative companies across the globe which has helped them dominate the market to a huge extent. Though their social networking unit Google+ has not yet materialized a lot. It lags behind Facebook by a huge margin.

The company which is third in the list, Yahoo! Inc (NASDAQ: YHOO), is showing declining figures. But this re-targeting concept was used by them quite successfully for a good period of time. It’s not that the revenues are declining because of the failure of the marketing model but it is primarily due to its inability to retain its user database. They have not been performing in any of their frontiers and that is the reason why the investors are slowly fading away. They bought back the shares from Ali baba which gave some respite to its investors.

The next most important step for Facebook is to build an ad revenue model for its mobile platform. The world is moving fast and technological devices are getting smaller day by day. People are now moving into Smartphones and Tablets which is the very reason even the PC business has been struggling. If Facebook wants to sustain itself then it has to come up with some methodology to generate revenue from its mobile applications. Smartphones and Tablets can possibly be its next money minting machines.

Facebook for quite some time has been facing a tough time in generating ad revenue through its mobile database. The number of users visiting the website through mobile application has been increasing day by day. The situation demands for a shift of advertisers from web to mobile. But if they are not able to display ads then how will they generate revenue?

This is the big question that they are yet to answer because of which the stocks tumbled a few days back – as even Mark Zuckerberg did not have any response for the same. They should take a leaf out of Google’s book on how to generate ad revenue from its mobile application.

They had the vision of this technological transformation and that is the reason they were prepared for it. They have launched the Interactive video ads, which gets displayed when the user launches an application.  The advertisers can add buttons that users can click to find out more about their ads (if interested), without leaving the video experience or exiting the application. This is the reason investors have a lot of trust on the ability of Google to generate revenue even with huge technological drift.

Facebook’s stock price has been quite fragile. If one observes closely the movement is heavily dependent on how Mark Zuckerberg narrates its future earnings story. He needs to be a bit more proactive on this frontier and convince advertisers and investors on its ability to develop a consistent revenue growth model even through the mobile application. If they are able to do so, the humongous database will serve their needs. The opportunity is there, the foundation has been laid down, it is all about how Facebook can explore these opportunities to surpass its peers and emerge as a market leader once again. 

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Umang27 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 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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