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Facebook reiterates mobile risks in IPO filing

Caroline Gabriel

Caroline GabrielFacebook executives are on the IPO roadshow, drumming up investor interest in a transaction which values the social media firm at $96bn. However, uncertainties over the mobile profit model have been a repeated fly in the ointment, and the company this week amended its S-1 filing with the SEC to emphasize these risks.

The new filing details how the shift of social networkers from PCs to mobile devices, while it may create opportunities, is currently a negative, reducing what Facebook can charge for adverts and so threatening its key revenue stream in the longer term. Facebook has already said that it has not yet found a significant way to monetize its huge mobile user base, about 488m monthly average unique users as of March.

In the expanded S-1 document, the company says, under „risk factors‟: “We believe this in-creased usage of Facebook on mobile devices has contributed to the recent trend of our daily active users (DAUs) increasing more rapidly than the increase in the number of ads delivered. If users increasingly access Facebook mobile products as a substitute for access through personal computers, and if we are unable to successfully implement monetization strategies for our mobile users, or if we incur excessive expenses in this effort, our financial performance and ability to grow revenue would be negatively affected.”

The company has been taking some initiatives to generate mobile revenues, such as the new „sponsored stories‟ within mobile news feeds, but it has stressed that it will be cautious about any new features which would alienate users. Its wider mobile vision relies on trying to create a full apps, content and unified messaging platform around its core service, in order to generate revenues beyond its basic advertising model, and increase its overall impact. This will also be important to fend off potential challenges from rivals with existing mobile platforms, such as Google and Apple.

Two weeks saw Facebook making one step in that direction, launching its own app store. This will provide easy access to social apps on its platform, and will integrate simplified discovery and its payment options. The App Center will go live in the coming weeks via iOS and Android Facebook apps and on the web. All canvas, mobile and web apps that follow the firm‟s guide-lines can be listed. The aim is not to achieve the massive apps base of Apple, but to encourage mobile developers to use Facebook APIs – examples being Pinterest, Draw Something and Viddy. If the apps discovered via the new Center need to be installed, consumers will still be directed to App Store or Google Play.

Facebook said on its blog: “Many developers have been successful with in-app purchases, but to support more types of apps on Facebook.com, we will give developers the option to offer paid apps. This is a simple-to-implement payment feature that lets people pay a flat fee to use an app on Facebook.com.”

While the social giant is currently treading an uneasy path between collaborating with iOS and Android, and seeking to clip the wings of their owners, it hopes to have greater freedom of movement as the mobile market moves towards web services and HTML5, which will dilute the power of the individual operating systems, and so benefit firms which do not have their own OS. Facebook has made a major commitment to HTML5, having admitted the disadvantage of controlling an OS, especially with Google integrating its own social app, Google+, increasingly tightly into Android.

For that reason, there have been persistent rumors that Facebook might develop its own OS, either by acquiring one (it was linked to webOS at one stage) or creating a new-style browser/OS on top of Linux or even Android, like Mozilla. It has also been developing a range of functionality for feature phones, tapping into emerging economies.

However, none of this promises a certain path to mobile profits in future. In its original IPO filing, the company said mobile platforms were “critical to maintaining user growth and engagement over the long term”, and that the rate of growth in mobile users would continue to exceed its overall user growth “for the foreseeable future, in part due to our focus on developing mobile products to encourage mobile use of Facebook”.

However, it added: “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.” It went on: “If we are unable to successfully implement monetization strategies for our mobile users, our revenue and financial results may be negatively affected.” It did point to the growth of mobile advertising, citing one source which forecast this to grow at a compound rate of 64% to reach $17.6bn in 2015. Most of Facebook‟s current revenue – about 85% in 2011 – comes from PC-based advertising and last year it made net profit of $668m on sales of $3.71bn.

Update – Last Minutes News: Investors are bracing for Facebook's Wall Street debut on Friday after the world's No.1 online social network raised about $16 billion in one of the biggest initial public offerings in U.S. history on May 17, 2012. Valued at $104 billion, Facebook is larger than Starbucks Corp and Hewlett-Packard combined, sparking intense speculation on how much higher its valuation will rise once shares start trading. Some expect shares could rise 30 percent or more on Friday, despite ongoing concerns about Facebook's long-term money-making potential. At $38 a share, Facebook would trade at over 100 times historical earnings versus Apple Inc's 14 times and Google Inc's 19 times.

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