Facebook’s balancing act

Investors wiped $10 billion off the value of social network giant Facebook Inc on Friday (27 July), taking it to a new low after the group provided no forecast, while analysts said that mobile investments would put future earnings under pressure.

Facebook has seen its market cap drop to $48 billion — half its IPO launch value of $100 billion in May. The question is why?

According to John Ginsberg, marketing director of multi-channel marketing company, Ensight, the general consensus is that Facebook has hit a ceiling with its desktop- and laptop-based platform in terms of the number of users – which is obvious with the slowdown in the growth of web-based numbers.

“Although the number of web interface users makes up the largest portion of Facebook users, web-based usage is likely to plateau at some point in the future.”

However, Ginsberg noted that mobile adoption is booming and the number of users who access the Internet via mobile is quickly catching up to that of web-based users.

Globally, the sales of mobile devices such as smartphones, feature phones and tablets have overtaken that of PCs and laptops and the marketing executive says that Facebook will need to follow this trend in order to succeed in the long run.

“Facebook has identified the shift to mobile – as CEO Mark Zuckerberg highlighted in his recent results interview that active monthly users on mobile have grown to 543 million from 325 million a year ago – it now faces the challenge of how to monetise its mobile offering. Right now, Facebook is very cautious to monetise its mobile offering in fear of alienating their current users who are both its biggest asset and its biggest liability,” Ginsberg said.

He said that, due to the fact the Facebook is a free service, “users can easily be alienated and jump ship to other social media platforms if Facebook is too aggressive in its approach to monetise its mobile offering as users do not want to be bombarded with irritating advertising campaigns.”

What is clear, according to Ginsberg, is that that Facebook’s 900 million strong users dictate its future and the company will need to strategise very carefully when it comes to boosting its revenue via mobile.

Local insight

On the local front, Ensight says that the extent to which South African Facebook users will be affected is largely dependent on the direction of Facebook’s strategy. There is a high penetration of mobile phones in South Africa, with a particularly high uptake of feature-phone users.

Latest statistics released by World Wide Worx indicate that over the past year and a half browsing on mobile phones by South African users increased from 33% to 41%, with Facebook accounting for 38% of time spent on mobile Internet browsing.

Furthermore, the study also showed that cellphone spend on data has increased by half in the past 18 month from 8% to 12%. Thus, Facebook can win many hearts in South Africa if they invest in the feature phone market by developing a rich user experience for feature phone users.

A relationship with smartphone vendors

According to Ginsberg, Facebook is very keen to position itself strategically with partnerships in order to cement its sustainability as a social network. This is proven through its new relationship with Apple where the companies have reached an agreement to integrate Facebook into the new version of iOS, Apple’s mobile device operating software.

“Facebook needs to be positioned very carefully and strategically with the majority of smartphone users in order to go up against Google because Google develops the Android software, which is installed on the majority of smartphones other than Blackberry, Apple and Nokia.

“Because the majority of smartphone devices run on Android software and the volume of phones preinstalled with Android software sold per day beats other smartphones such as Apple, Facebook faces the threat of Google integrating its social network Google+ into its Android software and thus overtaking Facebook mobile users,” Ginsberg said.

A smartphone and a ‘Want’ button

Ensight underlined how Zuckerberg has confirmed suspicions that developing a smartphone simply does not suit the company’s strategy and focus, as they are not smartphone experts and do not have specialist hardware expertise.

“Developing a smartphone would mean Facebook would be competing directly with other smartphone vendors which could jeopardise their relationship with smartphone developers they are currently trying to build strategic partnerships with,” Ginsberg said.

He added that the rumoured “want” button will also probably not be created, simply because Facebook’s strategy is centred around creating an extensive platform to enable multiple parties to create their own actions and conversations.

“In fact, when you think about it the current ‘Like’ button is not a very descriptive word as it has been broadened out to mean many things – for example, when someone passes away and a user ‘Likes’ someone’s condolence message, it is actually a bit odd when you think about it,” Ginsberg said.

“Furthermore, one of the multiple meanings of ‘Like’ may already be ‘to want’ something. Therefore, there would simply be no value in Facebook creating a ‘want’ button.”

Investing in Facebook

Investing in Facebook is a long-term prospect, Ginsberg says. “Its second quarter results posted a $515 million adjusted profit and a 32% increase in revenue year-on-year to %1.2 billion – these type of results are particularly impressive given the fact that Zynga, which provides approximately 15% of Facebook’s revenue, posted an unexpected loss the day before. Investors now need to make a decision as to whether they feel Facebook will be successful in generating new monetisation opportunities.”

In his results interview, Zuckerberg highlighted that Facebook will focus on growing its mobile app space as part of its growth strategy. Sheryl Sandberg, Zuckerberg’s second in command, also pointed out Facebook’s new advertising opportunity of “sponsored stories” has proven particularly successful by generating about $1 million per day.

“Facebook will have to find a balance where the company can create revenue – particularly in the mobile space – without irritating users. Google has found a model that worked well, as proven by a 21% increase in ad revenue posted over the most recent quarter in comparison to Facebook’s 28% ad revenue growth in one year. While Facebook has aligned its strategy in the right direction, it just needs to follow through,” Ginsberg concluded.

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Facebook’s balancing act