The Problem of Mobility and Facebook’s Battle for Revenue

LONE PINE CAPITALSocial media figures prominently amongst mobile phone users in the US, with roughly 80% of all mobile phone owners using Facebook. It may sound like a goldmine, but Facebook doesn’t make any money from its mobile products. “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,” said the company in the review of risks it faces filed in its IPO paperwork. Of course, it is entirely possible that Facebook is holding back, delaying the launch of mobile revenues until after it has more of a footing in the mobile market (the same “ad-free” strategy it used when it first launched), or waiting until after its IPO. After all, Facebook already laid the groundwork for this with programs like Facebook Places. Mobile ads that provide coupons based on places a person checks in would be an easy first step into mobile revenues for Facebook. Given that the number of people in the US that use smartphones grew by over 45 percent in 2011, Facebook would really be missing the ball by not getting into the mobile market. Ads are currently Facebook’s largest source of revenue, with partners like Zynga (ZNGA) that runs applications on Facebook running second – leaving open the opportunity for Facebook to earn mobile revenues through monetizing applications as well as traditional ads.

Of course, such matters are never simple and this one is no exception. First there is the cost. If Facebook monetized its apps, it could have to give the operating system a cut. Hedge fund favorite Apple (AAPL) takes 30 percent of app maker revenue from such sales. Right now, almost 29% of smartphone users in the US have an Apple phone. Android is even more popular. It is a mobile operating system or platform that Lone Pine Capital favorite Google (GOOG) developed. It accounts for over 44% of the smartphones used in the US. While the technology is open source, meaning that essentially everyone owns the technology, Google is its developer. Right now, it doesn’t place any restrictions on devices running its software, but it could be just a matter of time. BlackBerry, which is manufactured and developed by Research in Motion (RIMM) has 17 percent of the market. Prem Watsa’ s Fairfax Financial Holdings (FRFHF) owns over 5 percent of the company. App developers are required to pay vendor fees in addition to a variety of other fees. Phones running one of Microsoft’s (MSFT) Windows operating systems are next at roughly 7 percent of the market. MSFT requires app developers to pay yearly fees in addition to 30 percent of revenues.

Next, Facebook has to consider the quality of its mobile platforms. Could they even support advertisements and other monetization? Probably not. Facebook’s mobile apps frequently shut down or freeze, propelling customers to go to the site via their browsers. This could be a major part of Facebook’s strategy – why drive when you can be driven? In other words, why spend the time and money developing amazing mobile apps, that do not currently have monetization and would require paying a fee to the operating system, when you can push users to the site, where there is advertising and no operating system fees? “It’s always to Facebook’s advantage to have the Web be their operating system and leverage that to their advantage,” said Joe Hewitt, the man who created Facebook’s first iPhone app. “You can develop on the Web and reuse as much of the code as you can.”

Given Facebook’s unique ability to offer its advertisers extremely specialized targeting, not to mention the wide breadth of its scope, Facebook is in a position to make a fortune off mobile advertising, as long as it doesn’t annoy its users. In its IPO filing with the SEC on February 1, Facebook did indicate that it does plan to experiment with mobile advertising. Its idea is to plug sponsored stories into update streams. The messages would involve the user friends’ names and could read something like, “John Doe likes Ford.” Facebook is setting up an event in late February for its advertisers, in which its strategies will be explained.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Largest Pharmaceutical Companies In the World

The 10 Most Expensive Android Apps

The 9 Most Expensive Designer Bags in the World

The 7 Most Expensive Real Estate in the World

The 10 Most Expensive eBay Items Ever Sold

The 10 Most Expensive iPhone Apps

The 9 Most Expensive Designer Shoes in the World

The 10 Most Expensive Cigarette Brands

The 10 Most Expensive Law Schools in the US

The 10 Best Wall Street Movies

The 10 Most Expensive Golf Clubs Ever Sold

The 10 Most Expensive Golf Memberships

The 10 Best Disney Characters Ever Created

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!