Facebook's weak spot is mobile

Matt Rourke / AP

The Facebook logo is displayed on an iPad.

By Roland Jones, NBC News

It has been Facebook?s Achilles' heel ever since it went public in a disastrous IPO two months ago: How can the social network make more money from mobile advertising?

It?s a question worth asking given the rapid shift of Facebook users from desktop and laptop computers to mobile devices. And the uncertainty helped drive Facebook shares down Friday to their lowest since it went public.

Internet research company Juniper Research predicts that by 2017 mobile search will be a $15 billion per year business, generating nearly triple this year's total, with ad space in these markets representing prime real estate for advertisers.

?Nobody is really making money from mobile right now, except for Google? said Rob Enderle, an analyst with Enderle Group. ?So this is a problem for the whole industry.?

When it reported its first quarterly results since going public Thursday, the company said it had 955 million monthly active users at the end of June, up 29 percent from the same period a year before. Some 543 million accessed Facebook from a mobile device, the company said, up 67 percent from the same quarter last year.

Yet it?s still not clear how the company will make money from its rapidly expanding base of mobile users.

In the buildup to its initial public offering in May, Facebook hinted at problems with its mobile strategy. The warnings led some analysts to lower their growth outlooks for the company and troubled major Wall Street investors in the days before the company?s IPO.

Facebook?s stock offering was marred by trading glitches and has triggered several lawsuits. The company?s share price has since dropped almost 40 percent from its initial price of $38.

Facebook continues to grapple with the difficulties it spelled out before its IPO.

During its earnings conference call Thursday, Facebook said its user base grew more quickly than the number of ads it shows to users, as Facebook users spend more time using the Facebook mobile app. The company said this is especially true in markets where smartphone use is growing rapidly, such as the U.S.

However, CEO Mark Zuckerberg noted that its recently introduced ?Sponsored Stories? -- essentially, a blend of news and advertising that appears in a user?s ?Newsfeed? -- are performing relatively well, generating about $1 million per day in June, with about half that coming from mobile devices.

?This is an encouraging start in our effort to generate revenue from the mobile use of Facebook,? Zuckerberg said. ?We know that social ads perform much better than nonsocial ads, so our job over the next few years is to increase the percentage of ads that are social and engaging.?

Facebook sees Sponsored Stories as the ?cornerstone? of its mobile monetization strategy, but Enderle is skeptical of their potential to drive advertising up over the longer term.

?Most of us just call it spam, and it won?t be long before someone develops a way to filter it out,? he said. ?If a TV anchor starts selling you products during the evening news you?ll soon change the channel and watch another news show.?

The challenge for Facebook is there?s not a lot of real estate for ads on mobile devices, Enderle noted. The sorts of ads you can show on YouTube -- short videos -- don?t really work on Facebook, he added.

?This is definitely a problem,? he said. ?Someone needs to get to work to figure this out. They should find the solution first instead of talking about the problem.?

Last June, Facebook hit a potential stumbling block in its efforts to make money from Sponsored Stories. It agreed to pay $20 million to settle a lawsuit in California claiming?it?publicized?that some of its users had ?liked? certain advertisers?but didn't?pay the users, or give them a way to opt out.

Facebook said Thursday its revenue from advertising rose 28 percent in the second quarter from the same period a year before, accounting for $992 million, or 84 percent of total revenue. Facebook said it saw an 18 percent increase in the number of ads delivered in the quarter, and that much of its daily user growth came from new users in Brazil, India and Japan.

Growth outside the U.S. represents a challenge for Facebook, as each new user brings the company less revenue. According to the company?s own data, Facebook brings in $3 per user in the U.S. and in Canada, but only $1.50 in Europe and just 50 cents in Asia.

Growth overseas ?is going to be tough,? said Enderle.

?They should probably focus on capitalizing on the markets they?re in now instead of putting their faith in growth in emerging markets,? he said. ?You should put your efforts into mining the properties you have, not mining the mines you haven?t dug yet.?

Facebook?s aim is to stay focused on global growth. On Thursday Zuckerberg said the company?s goal is to connect everyone in the world, and predicted that over the next five years the company expects ?4 billion to 5 billion people to have smartphones -- that?s more than twice as many people that have computers today.?

Michael Pachter, an analyst at Wedbush Securities, expects Facebook to see rapid growth through mobile, adding that he doesn?t care if Facebook makes less revenue from mobile if Facebook gets ?a lot more users spending a lot more minutes? on the site.

?This is a headwind only if you see mobile as a substitute for the desktop,? he told CNBC. ?Obviously, if everyone stops going on Facebook on their desktop and shifts to mobile you?ll see revenue decline, but I don?t think that is what we are talking about.?

?We are going to see desktop [be] relative stable,? Pachter continued. ?I think the growth is going to come from mobile, so that?s incremental growth, and I don?t see that as a headwind at all.?

Michael Pachter, Wedbush Securities, offers insight on Facebook's earnings results, highlighting its drastic slowdown in revenue growth after the bell yesterday.

Source: http://marketday.nbcnews.com/_news/2012/07/27/12990023-facebooks-weak-spot-is-mobile?lite

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