Facebook (FB) shares fell 11% Monday, highlighting the challenges the No. 1 social network faces to live up to its frothy market value.
And at the top of the challenges list for many observers is how the company can convert fast-rising numbers of mobile users into fast-rising revenue.
Facebook already has some 488 million mobile users, its fastest-growing platform, but hasn't yet unveiled a strategy to make money in the field.
The stock numbers haven't looked good yet for Facebook, but its future mobile ad numbers may tell real story. View Enlarged Image
The company doesn't "directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven," Facebook said in its IPO filings.
For analysts, and apparently plenty of investors, that wording is a red flag.
"I don't think any of us have a clue what Facebook is planning in mobile," said Trip Chowdhry, an analyst at Global Equities Research. "Mobile will not be an easy space for Facebook to crack. It's very challenging."
At its Monday closing price of 34.03, below the 38 starting price for Friday's record-setting but disappointing IPO, Facebook still is valued at more than $93 billion, nearly as much as decade-older e-tail king Amazon.com (AMZN), which had 13 times as much revenue as Facebook last quarter. To live up to such a value, Facebook will have to ramp up revenue.
Analysts say only two companies to date have partly unlocked the mobile ad puzzle.
Apple (AAPL) and Google (GOOG) have gained solid revenue through mobile platforms.
Google expects to surpass $800 million in mobile search and other mobile ad revenue via Android this year, and $1.27 billion in 2013, according to reports. Much of that would come from sponsored links on mobile Web searches. Google also sees opportunities to monetize music, videos, books and content accessed via mobile devices and its Android platform.
Facebook needs to develop technical skills and business relationships in mobile, which analyst Chowdhry says could take another two or three years.
At a mobile conference last week, Chowdhry said he learned Facebook might be working on two mobile ad formats. One is to place ads in-between Facebook user notifications. Another is for Facebook to display ads when users launch or shut down an application.
Facebook's many challenges in mobile include dealing with how people use the social networking platform, says Jack Gold, principal of research firm J. Gold Associates. On-the-go people use smartphones to check in and initiate quick chat sessions. But given the limited real estate on handsets, trying to stuff in some ads could be an unwanted intrusion.
"If they start pumping in ads, it could become more difficult for users to do the things they want to do," Gold said. "Will people accept ads on a small form factor when all they want to do is find out what's going on, and get in and out fast?"
Developing a mobile ad platform "is not a trivial exercise," Gold said. "Companies have been trying for a number of years to do this."
Among other things, he says Facebook needs to develop or acquire expertise in location awareness — technology that tracks where mobile users are physically located. That way, Facebook can deliver ads relevant to specific locations, such as for a nearby eatery or store.
Since 2011, Facebook has made three acquisitions directly tied to mobile. In January 2011 it bought mobile ad firm Rel8tion for an undisclosed amount. In March 2011, it bought mobile app developer Snaptu for an estimated $65 million.
In December, Facebook acquired Gowalla, a provider of location-aware services, for an undisclosed amount.
"Location awareness in mobile is a fundamental enabler," Gold said. "If you don't have it, then that's a problem long term."
Facebook's largest acquisition to date took place last month when it bought photo-sharing platform Instagram for a reported $1 billion. Instagram — for now — is not an ad platform, but it's designed for mobile users to take snapshots and post them onto Facebook.
Can Facebook connect these various pieces to bring in more mobile advertising?
"Facebook usage is rapidly shifting toward mobile devices where monetization is unproven," Richard Greenfield, an analyst for BTIG Group, wrote Monday in a report as he initiated coverage of the stock with a neutral rating. "We believe this too will take time and is not without its risks. We believe there is limited upside to Facebook's shares over the next year."
by Brian Deagon Investor's Business Daily
Facebook Strategy In Mobile Unclear But Needed To Justify $100 Billion Valuation - Investors.com