Move to mobiles and share rebound leaves Facebook sitting pretty

/// Move to mobiles and share rebound leaves Facebook sitting pretty

August 5, 2013  |  Blog

When Facebook was preparing to float in May 2012, former analyst Henry Blodget – now the high-energy editor of the Business Insider website – was unambiguous. The stock was, he said, “muppet bait” – so widely anticipated and hyped that there was no chance of beating the market by subscribing to the IPO and then “flipping” the shares on the first day.

The $38 launch came, and the price duly went down. Blodget’s warning had been correct. Plenty of professionals and amateurs made paper losses.

Yet 15 months on, Facebook shares have finally reached $38 again, having roared back from $26 in just over a week. (They closed at $38.05 on Friday.) Suddenly Facebook, like the Muppets themselves, is enjoying something of a revival.

Analysts who had written off the social network’s chances against Google had to eat their words. Revenues jumped 53% in the second quarter to $1.81bn, the company said last month. And a significant, and growing, proportion of that – 41% of all its advertising revenue – came from mobile.

This is important, because more and more people are using the internet through their smartphone. In the past year Facebook’s mobile-only users have more than doubled, to 219 million, while the number of people using the mobile site some of the time is up to 600 million, from 441 million.

That growth, and the decline in its desktop-only users (falling by about 38 million a quarter) suggests that by the end of this year mobile-only users will outnumber the desktop-only ones. For a site that began on the desktop in 2004, it will be a significant moment, and in terms of making money it had looked like a significant challenge.

Until now, perhaps. Richard Holway, a veteran industry analyst at TechMarketView, recently called Facebook “a passing fad”. But even he says he is “in awe of what they have achieved in the past six months”. In particular, he’s impressed at how Facebook has converted its growing base of mobile users into a source of advertising revenue.

“Incorporating adverts into the news feed – thing people see on the mobile site – rather than irritating them with ads on the side, or flashing and taking over the screen, is so clever. People find that acceptable. To have cracked a way of getting people to accept mobile ads is quite an achievement,” Holway says.

Richard Windsor, a former Nomura technology analyst who now runs his own consultancy, said of Facebook’s second-quarter figures: “One out of every 20 items [in the news feed] is an advertisement, and there has been no drop in satisfaction, which mean the advertising is relevant to the users and they are tolerant of it. How far Facebook can push this is uncertain, but I suspect this could probably go to one item in 10 items before users start getting annoyed.”

For Mark Zuckerberg, who in June had to suffer being upbraided by angry shareholders at the company’s first annual meeting as the stock sat 37% below its offer price, this is a welcome relief. Yet he still faces searching questions about Facebook’s future. During the earnings call for the second-quarter figures, he was asked about a Pew Internet poll from May which suggested that American teenagers are abandoning Facebook for instant messaging services such as WhatsApp and Twitter, and image-sharing sites like Snapchat.

“Based on our data, that’s simply not true,” Zuckerberg shot back. They may not be joining the service much, but “we’ve been fully penetrated in the teen demographic for a while now”.

But to Holway, that message means Facebook has hit a plateau: “And we all know what comes after a plateau.”

Granted, from its plateau Facebook can look down on a lot of rivals, including Yahoo and Microsoft, Apple’s iAds, and music services Pandora and Spotify. According to eMarketer, which tracks mobile market ad spending, Facebook’s mobile revenues will more than triple this year to just over $2bn, and it will more than double its share of the global mobile advertising market – to almost 13%, up from just over 5% when it started selling mobile ads in 2012.

The challenge remains Google, which scooped more than half the global $8.8bn mobile ad market in 2012. Despite Facebook’s growth, in 2013 Google will account for 56%, eMarketer predicts.

Windsor warns: “The problem is that when Facebook has maximised the monetisation of social networking, growth will grind to halt. The better things are now, the more quickly this will happen.”

Overall, he still thinks Facebook is “a one-trick pony offering very little outside of its core social networking service”. He points out that despite Facebook being one of the most-used social networking apps, it accounts for just 26% of the time the average person spends on a smartphone. Google has services for 66% (email, browsing, maps, social networking). That, he suggests, is why Google makes so much more from mobile.

Facebook tried to address that with the release in April of Facebook Home, an app that would transform phones running Google’s Android software into an all-Facebook, all-the-time experience. There was also a dedicated phone, the HTC First (made with the Taiwanese handset maker), which would have Facebook Home installed from the start.

It was a colossal flop. Reports suggested AT&T sold a few thousand of the handsets in the US before axing it, leaving HTC with excess products.

Meanwhile the Guardian’s revelations about Facebook’s co-operation (along with others) with the US National Security Agency had hurt it at a time when it wanted to re-emphasise privacy. It may not be a coincidence that on Wednesday it announced that all connections to Facebook are now encrypted – though data on its servers won’t necessarily be.

Holway suggests that as the world moves more and more to mobile, Facebook may actually have an edge over Google. “Facebook seems to be making more per mobile click than before,” he says. “Whereas what has spooked the markets about Google is that it is making less per click on mobile.” That has seen Google’s share price decline as it has seen those less valuable clicks – while Facebook is turning mobile views into money.

Even so, he sticks to his warning about “a passing fad”. That followed his own experience in Hong Kong recently, where he walked through a commuter carriage one morning looking at what people were viewing on their smartphones and tablets. “I couldn’t find a single one who was on Facebook,” he says. “And these were people aged 18-30 going to work, on a Mass Transit train which provides free Wi-Fi. That was a real eye-opener to me.”

It was on that basis that he called Facebook a “passing fad” – though he notes that even if it is, Zuckerberg’s dream need not die. It can just buy the companies its target audience has shifted to. In May it was rumoured to be bidding for Waze, the Israeli social mapping company. Google won that auction, but the intention was clear: Facebook wants to vacuum up all other emerging “social” networks.

Facebook has already bought photo-sharing site Instagram for $1bn; there’s no reason why it might not follow that with Snapchat, which has entranced tens of millions of teens the world over with its short-lived shared photos.

“Facebook is worth $95bn,” Holway laughs. “You can buy an awful lot of companies with that.”

Perhaps the “muppets” will see some benefits after all.

Link: Move to mobiles and share rebound leaves Facebook sitting pretty

The Guardian – Charles Arthur


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