Will Facebook Ever Make Money?
Facebook is still trying to prove it can make money following last spring's disastrous public offering, but the solution is more complex than just advertising.
The social network, which boasts a billion users, still hasn't found a way to make money from them, despite rolling out new features, which they hope will bring in some much needed capital.
In addition, Facebook has yet to capitalize on its mobile user base, which is becoming the majority of its users. More than 500 million users are logging on through mobile devices and despite debuting apps and integrating with Apple's iOS 6 operating system, the social network is struggling to get traction in this arena.
But Facebook's advertising woes and inability to capitalize on its mobile base are just a small part of its financial struggles. A series of letters between Facebook and the Securities and Exchanges Commission in the days before its IPO show a company that didn't want to reveal its weaknesses in advertising and especially to mobile, Bloomberg reports. Shortly after the release of this material, Facebook's stock took another hit and hover around $20, or about half $38 initial price tag. And as 2012 comes to a close, investors are pressuring Facebook to master the mobile realm and lift dismal stock prices.
Blown Away by Mobile
With such a large user base, advertising revenues should be flowing for Facebook and allaying stockholder concerns. But many of those users are migrating to phones and apps to access the network, a transition that's more complicated to monetize. When users are on smaller screens, ads must be made smaller so they don't clutter up the landscape -- and unlike on a PC, the ads can't show up on every display.
In the early days of the IPO, Facebook seemed in denial over the soaring number of mobile users. The letters show Zuckerberg and other company officials holding back on crucial details about whether it could make money from the soaring numbers of people who now access the Internet through mobile devices, rather than on a laptop or desktop computer.
Finally, just a week before the offering, Facebook filed paperwork disclosing that mobile users were growing more quickly than advertising revenue, which may hurt profits.
"We believe this increased usage of Facebook on mobile devices has contributed to the recent trend of our daily active users, or DAUs, increasing more rapidly than the increase in the number of ads delivered," Facebook said in the May 9 filing. "We believe this trend is driven in part by increased usage of Facebook on mobile devices where we have only recently begun showing an immaterial number of sponsored stories in News Feed, and in part due to certain pages having fewer ads per page as a result of product decisions."
The problem hasn't changed. On October 4, Facebook said it counts a billion users worldwide, up from 845 million at the beginning of the year, and more than 600 million users are on Facebook through their mobile devices, marking a growth of around 40 percent this year alone.
But serving mobile ads, ironically, can end up hurting Facebook's revenue, even though it needs to pay more attention to those users. Mobile ads bring in less money than regular Internet ads, but Facebook can't alienate this demographic, since mobile devices are increasingly being used to browse the Web.
A Series of Solutions
Facebook's main challenge, switching to mobile, has been hindered by poorly performing apps. Facebook has unveiled new versions of its apps for iPhone and iPad, after the initial software proved sluggish. The new apps run faster because they're written specifically for iOS using Apple's programming language, rather web-based technology, and Facebook says they are transforming into a "mobile first" company.
Facebook is also trying to spread mobile expertise through the company, the New York Times reports, with about 100 engineers now working on mobile products.
But even the best mobile app won't pay off if the advertising isn't there. Richard Greenfield, a media analyst at BTIG, said advertisers like ads that are hard to ignore on a smaller screen, but users find them annoying and intrusive. In addition, mobile ads are more difficult to work with because many devices don't run Adobe Flash.
Facebook also plans to focus more on sponsored stories, which treats posts from users as ads. If a user clicks a "Like" button on the page from a certain brand, and the company pays for sponsored advertising, a notice shows up on the users' friends feeds notifying them of the product. It even looks just like a regular Facebook posting rather than an advertisement.
Gokul Rajaram, Facebook's product director of ads, told the Times that sponsored ads are generating about $1 million a day, of which half comes from mobile users.
Facebook is also looking at an "App Center," giving people a way to find iOS and Android apps with its company tie-ins, such as with online gaming. The social giant hopes to turn App Center into a place for people to discover apps for all their devices -- and make a few bucks.
Billing Users Directly
The company makes a big deal in advertising itself as a free service, and it'll stay that way to keep users on its site. But that doesn't mean Facebook is beyond getting more money out of its users. The latest service is "featured posts," which lets users pay an extra $7 to increase the likelihood their friends will see their posts. Facebook, which started offering the service back in May, reasons that as news feeds become cluttered with status updates and paid ads, posts from friends can get lost or not show up at all.
For people who are having yard sales, the service is just what they need, but for the bulk of users, Facebook won't be getting a dime.
The idea of a premium service atop free is nothing new. LinkedIn offers a similar paid service to contact members outside one's network. But unlike the business realm that LinkedIn is in, casual Facebook users aren't likely to pay to promote their posts. Why? Because it doesn't make them money, but that e-mail to a prospective client may.
Still, Facebook is on a slippery slope. Should the company begin to offer more paid services, where they were once free, users will flee to a competing service, or if one's not yet available, leave room for a competitor to spring forth. If social media has taught us anything, it's that members are short on loyalty. Just ask Friendster or MySpace.
Facebook's Great Expectations
In the end, Facebook's monetization problems run deeper than mobile ads or apps -- it comes instead from its own inability to square away its overall financial picture, as evidenced by a series of correspondences.
Back in February, when Zuckerberg first announced IPO plans, the company touted its advertising revenue. It also pointed to the massive numbers of users, saying its friends networks translates into more ads being seen -- and advertisers would flock to take advantage.
But the figures sounded more like marketing reports than actual statistics, Barbara Jacobs, the SEC's assistant director for corporation finance found. She told Facebook CFO David Ebersman to drop references to Nielsen reports, which the company used to back its advertising claims, and after initial resistance, the company backed down.
Over the next few months, Ebersman and Facebook's attorneys jostled with the SEC, showing a management team hesitant to disclose information about its less-than-impressive finances.
"They were given the benefit of the doubt when they went public that they were ready for prime time," Michael Pachter, a managing director at Wedbush Securities, told Bloomberg. "They still haven't proved that they are."
Tip of the Iceberg?
In the long run, Facebook's IPO, used to bring in an influx of cash needed to keep up its burgeoning operations, may be its downfall. Yes, the site is one billion users strong, a number that appeals to advertisers, but the company is walking a fine line by introducing optional pay services -- especially when people expect to get its services for free.
The focus on Facebook's dazzling numbers blinded investors to what was underneath -- a site that looks good on paper but which has yet to determine how to translate those numbers into actual dollars. Visitors have "banner blindness" to the site's sidebar ads -- some silly, some serious but all money makers for Facebook. And featured posts and mobile apps are a stopgap, not a long-term solution. Mobile means new challenges -- a loss of advertising space and potential -- for the struggling company, but also new opportunities, if it can figure out and execute on a plan.
But investors, voicing concerns about Facebook's lack of transparency, are beginning to cut their losses and buy elsewhere. Facebook is under the gun to prove it can still make money, and Zuckerberg and his assembled team are running out of time to do it. ♦
Categories: News Desk