By JENNA WORTHAM
Published: February 5, 2012
NEW YORK TIMES
Amid the jaw-dropping financial figures the company revealed last week when it filed for a public offering was an interesting admission. Although more than half of its 845 million members log into Facebook on a mobile device, the company has not yet found a way to make real money from that use.
“We do not currently directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven,” the company said in its review of the risks it faces.
In a world that is rapidly moving toward an era of mobile computing, this is a troubling issue for Silicon Valley’s brightest star — particularly since much of Facebook’s growth right now is in countries like Chile, Turkey, Venezuela and Brazil, where people largely have access to the Internet using cellphones.
Enlarge This ImageLots of people love their cellphones. Facebook, so far, is not a big fan.
Kim White/Getty Images
Mark Zuckerberg and Facebook plan to experiment with mobile advertising, including inserting so-called sponsored stories into users' update streams.
Facebook is not the only company struggling to translate the success of its Web site to mobile devices, where screen space is at a premium and people have little patience for clutter or slow loading times. It is a problem that plagues companies as diverse as news publishers and the streaming radio service Pandora, and it is likely to loom larger. There were more global shipments of smartphones than of personal computers in 2011, according to a recent report from Canalys, a research firm.
But the issue seems particularly urgent in the case of Facebook, which is wildly popular among its users and is seen as a company of the future, a hybrid of social hub and information conduit, platform and publisher. In other words, if Facebook cannot figure it out, who can?
“It’s a huge Achilles’ heel for them,” said Susan Etlinger, a consultant at the Altimeter Group who advises companies on how to use technology. “There’s clearly a movement toward more social media consumption on mobile devices, and Facebook doesn’t have a revenue strategy for that shift. They haven’t figured it out yet.”
Facebook declined to comment in advance of its offering, but the company outlined its concerns in the filing, stating that it expected its mobile users to “exceed the growth rate of our overall monthly active users for the foreseeable future.” And if executives are not able to chart a path to profitability on mobile platforms, the filing indicated, the company’s “revenue and financial results may be negatively affected.”
At stake, experts say, is a large chunk of advertising revenue. Facebook brings in most of its revenue by selling space on its Web site to advertisers who want to reach its users. Overall spending on mobile advertising in the United States is expected to reach $2.6 billion this year, up 80 percent from $1.45 billion in 2011, according to research by eMarketer. But that will still be just a sliver of what is likely to be a $39.5 billion online advertising market.
Google, a Facebook competitor on the Web, was the biggest player in the mobile ad market last year with about $750 million in revenue, and Apple came in second with more than $90 million, eMarketer says.
“It’s still immature when compared to online, print and TV advertising,” said Noah Elkin, an analyst with eMarketer. “But it’s growing at a faster pace, even though its revenues are still dwarfed by the other formats.”
One big problem with mobile ads is that users are less receptive to intrusive advertisements when they are focused on a goal like quickly posting a status update or finding an address. People using the Web on a computer tend to click on online ads up to eight times as often as those on mobile devices, Mr. Elkin said.
“We’ve had ads on our desktops for 15 years and we’re used to them,” he said. “But on the smaller smartphone screen, they’re distracting and viewers tend to notice them more even though there are usually fewer ads.”
It is still relatively early in the evolution of mobile marketing, of course, and it is possible Facebook is deliberately holding back in this area. Analysts say the company may be focusing on building traffic to its mobile Web site and applications first — much as it originally kept its regular Web site free of ads to avoid alienating new users.
Bay Ismoyo/Agence France-Presse — Getty Images
Overall spending on mobile advertising in the United States is expected to reach $2.6 billion this year, up 80 percent from $1.45 billion in 2011, according to research by eMarketer
But Facebook may also be sitting on an untapped reservoir of advertising revenue, experts say. Its mobile ads could be highly lucrative should the company start showing users advertisements or coupons pegged to the places they visit and the businesses they frequent.
Facebook has begun to creep into that territory with Places, a service that allows users to “check in” and share their whereabouts with friends. That, and other location services, could eventually lay the groundwork for attracting local and small-business advertisers.
“Even though Facebook’s browser advertising is already very targeted compared to other services, mobile advertising could be even more so, because it could take location into account as well," said Jan Dawson, the chief telecommunications analyst at the research firm Ovum.
After ads, Facebook’s second-biggest source of revenue is payments from partners like Zynga that have games and other apps running on its site. When those app makers sell things like virtual goods through Facebook’s payment system, Facebook takes a cut — and in the case of Zynga, that cut generated 12 percent of Facebook’s revenue last year. But on iPhones and iPads, Facebook has to contend with Apple, which takes its own share of app makers’ revenue from such sales.
If Facebook were to bring Zynga’s games to its iPhone and iPad apps, for example, it would have to share that revenue with Apple, which requires app makers to hand over 30 percent of their proceeds.
Google puts no such restrictions on apps for devices running its Android software, but given the increasing rivalry between Facebook and Google in social networking, Facebook is not in full control of its destiny there either.
“The question is about who will be in the driver’s seat,” said Sandeep Dahiya, an associate professor of finance at Georgetown University who specializes in corporate finance and public offerings. “Can Facebook monetize applications and game play on top of Apple and Google?”
Given how crucial mobile activity is for Facebook’s future, it came as a surprise to many that the company seemed to drag its feet in releasing an application for the iPad, as it finally did in October. Some criticize the company’s iPhone app for being sluggish and plagued with bugs.
That has led some to question whether Facebook has deliberately let its mobile applications languish while it settles on a broader strategy. If users come to Facebook through a mobile Web browser rather than through an app, the company can avoid the Apple toll booth.
“It’s the art of war,” said Shervin Pishevar, a serial entrepreneur who now advises and invests in social start-ups at Menlo Partners, a venture capital firm in Silicon Valley. “If the app is making users insane, they are just going to go to the browser version of the site. Which is a big win for Facebook because it gives them an advantage over Apple.”
Steering users to mobile-friendly Web pages also lets Facebook avoid making an app for every type of phone, said Joe Hewitt, who created the first iPhone app for Facebook and left the company last year.
“It’s always to Facebook’s advantage to have the Web be their operating system and leverage that to their advantage,” he said. “You can develop on the Web and reuse as much of the code as you can.”
In its filing, Facebook did say it planned to explore and experiment with mobile advertising, including inserting so-called sponsored stories into the stream of updates. These are messages involving a user’s friends that an advertiser can choose to highlight and amplify — as in “Bob Smith likes Gatorade.”
Facebook is also setting up an event later this month for Facebook advertisers, the first of its kind, which is to feature presentations from several top executives including Sheryl Sandberg, the chief operating officer.
Mr. Hewitt said he thought it was inevitable that Facebook would eventually flip a switch and incorporate advertisements into its mobile apps. “They’ll just have to find a way that won’t turn users off too much,” he said.
Brian X. Chen contributed reporting.
A version of this article appeared in print on February 6, 2012, on pageB1 of the New York edition with the headline: The Mobile Ad Challenge.
But Facebook may also be sitting on an untapped reservoir of advertising revenue, experts say. Its mobile ads could be highly lucrative should the company start showing users advertisements or coupons pegged to the places they visit and the businesses they frequent.
Facebook has begun to creep into that territory with Places, a service that allows users to “check in” and share their whereabouts with friends. That, and other location services, could eventually lay the groundwork for attracting local and small-business advertisers.
“Even though Facebook’s browser advertising is already very targeted compared to other services, mobile advertising could be even more so, because it could take location into account as well," said Jan Dawson, the chief telecommunications analyst at the research firm Ovum.
After ads, Facebook’s second-biggest source of revenue is payments from partners like Zynga that have games and other apps running on its site. When those app makers sell things like virtual goods through Facebook’s payment system, Facebook takes a cut — and in the case of Zynga, that cut generated 12 percent of Facebook’s revenue last year. But on iPhones and iPads, Facebook has to contend with Apple, which takes its own share of app makers’ revenue from such sales.
If Facebook were to bring Zynga’s games to its iPhone and iPad apps, for example, it would have to share that revenue with Apple, which requires app makers to hand over 30 percent of their proceeds.
Google puts no such restrictions on apps for devices running its Android software, but given the increasing rivalry between Facebook and Google in social networking, Facebook is not in full control of its destiny there either.
“The question is about who will be in the driver’s seat,” said Sandeep Dahiya, an associate professor of finance at Georgetown University who specializes in corporate finance and public offerings. “Can Facebook monetize applications and game play on top of Apple and Google?”
Given how crucial mobile activity is for Facebook’s future, it came as a surprise to many that the company seemed to drag its feet in releasing an application for the iPad, as it finally did in October. Some criticize the company’s iPhone app for being sluggish and plagued with bugs.
That has led some to question whether Facebook has deliberately let its mobile applications languish while it settles on a broader strategy. If users come to Facebook through a mobile Web browser rather than through an app, the company can avoid the Apple toll booth.
“It’s the art of war,” said Shervin Pishevar, a serial entrepreneur who now advises and invests in social start-ups at Menlo Partners, a venture capital firm in Silicon Valley. “If the app is making users insane, they are just going to go to the browser version of the site. Which is a big win for Facebook because it gives them an advantage over Apple.”
Steering users to mobile-friendly Web pages also lets Facebook avoid making an app for every type of phone, said Joe Hewitt, who created the first iPhone app for Facebook and left the company last year.
“It’s always to Facebook’s advantage to have the Web be their operating system and leverage that to their advantage,” he said. “You can develop on the Web and reuse as much of the code as you can.”
In its filing, Facebook did say it planned to explore and experiment with mobile advertising, including inserting so-called sponsored stories into the stream of updates. These are messages involving a user’s friends that an advertiser can choose to highlight and amplify — as in “Bob Smith likes Gatorade.”
Facebook is also setting up an event later this month for Facebook advertisers, the first of its kind, which is to feature presentations from several top executives including Sheryl Sandberg, the chief operating officer.
Mr. Hewitt said he thought it was inevitable that Facebook would eventually flip a switch and incorporate advertisements into its mobile apps. “They’ll just have to find a way that won’t turn users off too much,” he said.
Brian X. Chen contributed reporting.
A version of this article appeared in print on February 6, 2012, on pageB1 of the New York edition with the headline: The Mobile Ad Challenge.
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