To turn into a profitable company, valued at (say) a hundred billion dollars, they need to start making more money.
Now, there are two main ways they can do this.
1.) Increase number of users.
2.) Increase average revenue per user
They can attempt to increase their number of users by focussing on countries with low penetration. The problem with this, is that these users are harder to make money off (on average poorer, advertisers less interested in their eyeballs). In fact the article claims that these users are loss-making for Facebook at this time. There is (I guess) little scope for absolute user growth in the US, UK and European markets, in fact, its been suggested that user numbers are tailing off here.
Revenue per user: Given the constraints on users mentioned in the last paragraph it becomes really hard to increase your revenue per user. Especially if they're shifting to mobile which is harder to monetize. Any new users are probably going to harm this metric even more (as they'll tend to be poorer than existing users)
So, if Facebook want to say double their revenues how are they going to go about it?
It seems to me that, say, three years ago building an absolutely kickass mobile client, or just iPhone client, should have been a major priority (versus, say, randomly thrashing the timeline interface over and over).
Hey don't knock timeline! It's incredibly valuable for discovering that the two most important times in most people's lives are the year they were born and the year they joined Facebook.
Advertising is largely the art of throwing shit at a wall and seeing what sticks. Yeah, with a lot of tools and the information Facebook has about their users, we can perfect the art of how to make shit stick.
This is the classic failure of big media: treating your users like an audience (eyeballs). Facebook understands its users interactions, designs around them and is doing brilliantly at keeping them engaged, then they bring in people from the advertising world and treat them like an audience.
They should be monetizing the edges, not the nodes.
This is true, but nobody said that growing a large successful company was easy. FTA:
>> Daily Active Users (DAUs) have grown faster than the number of deliverable ads due to the limited mobile format
So step #1 for growing mobile revenue is to insert ads into mobile. I'm guessing they can manage this.
But the larger question of revenue for FB is interesting. And I think the conventional wisdom about their impending crash will be proven out if FB is managed poorly post-IPO. Specifically, if they don't innovate and deliver successful new products, they will fail. This is true of all technology companies. Facebook is no different because it's a social network. In fact, Facebook is much more like the past than e.g. Microsoft was at its IPO.
Third party mobile apps will also become an issue as consumers shift to mobile. For example Facebook, Twitter and Reddit all have very popular third party applications that bring in zero revenue for them. This is fine when the name of the game is all about increasing the number of users, but eventually they are going to need to increase the revenue per user.
Anyway, not surprised at all to see this report.
Well put. We agree. I don't have the link handy, but there was a post floating around on here a couple weeks ago about having customers, not users. Point being, social et all might be the sexy thing to be into, but from a business perspective it's basically a distraction. The real money is and probably always will be in the enterprise, government, health care - sectors where costs of acquiring, adapting, and leaving technology are all significant and so are the profits to be made.
Anyway, that post made an impact on me.
Then just after that our 3rd boy was born in Morristown Hospital in New Jersey. Supposedly voted "the best hospital in New Jersey". I was pretty amused to see that the state of the medical art that was networked all over the hospital was still running largely on Windows 98. I have to guess the contract to upgrade that software when it does come along will be worth what? Half a billion dollars? For one hospital? Anyway, I digress...
The other problem is that you can't pick the winner in every horse race. Facebook obviously won this round, but it just as easily could have been Orkut or any other social network that was out there. The traction model is almost certainly chaotic.
But one thing I never really got is how you can actually make money in the social space.... But that has nothing to do with the Instagramm / FB deal.
The money is there. It just isn't trivial to extract just like drilling for oil in deepwater.
I help with the SFJS meetup and we spend a bunch of money on food and beer (paid for by our lovely sponsors of course), but this is a completely missed opportunity by Meetup.com.
A startup like ZeroCater should be pitching Meetup.com for the opportunity to provide 1-click catering to meetups that want that handled for them.
Between knowing the number of people, ratio of men to women in an audience (us men typically consume more) and the time the event begins, meetup.com has all the info they need to get the food to the event in a semi-automated fashion. All that should be left to do is choose what kind of food. Facebook could do the same for its events.
On the other hand, I found it pretty obvious that facebook is in a powerfull position. That's an outside perspective since I'm not on it.
Revenue = (users) * (revenue per user)
A lot of services get the first operand right and fail to do anything with the second operand and effectively keep multiplying by zero.
TBH, I wouldn't be surprised if, in the current economy, there are some investors suggested to the founders of companies with a large user based that they shouldn't signal a monetization strategy to the market via soundbites like "Right now we're focused on growing, but we've got some ideas on how to monetize our userbase". The general idea being that it will be the acquirer's problem to figure out the monetization strategy. The moment you choose a monetization strategy you effectively allow people to value the company much more realistically instead of optimistically.
It's the Greater Fools theory in action, and actually being actively exploited to generate returns on early stage investments.
Amazing what an IPO can do for transparency. This is the sort of thing you'd never find out about a limited risk small company.
My point being - I'm not sure they get mobile apps. Which seems odd to me!
"Yes, today we'll be pitching a restaurant. We give away food for free! In a couple months/years when we have millions of people coming in for free food, we'll figure out some way to make money off of them. Probably advertising. Investment please!"