Research Notes

Can Facebook make money in India?

India has a dynamic and profitable IT sector, a growing middle class, and an explosion of mobile users. Facebook is not the first company that would like to tap the growing Indian market, but it will make a strategic error to think that it can copy-paste its business model from the West.
India is an interesting case for Facebook because only 4% of the population is on Facebook, but it is still the 3rd largest country on Facebook with over 51 million users. Of Facebook users in India, most are people under 30. This contrasts markedly to Western countries where middle aged people make a larger portion of users.

The two big concerns for Facebook in India are (1) that advertisers are primarily from the West and target Western, not Indian, customers, and (2) that most Indians access Facebook with a mobile phone, something which Facebook has not been able to monetize.

Strand Consult analyzed Facebook in India and presents the results in its new report
The good, the bad and the ugly side of Facebook – A report that describes how Facebook affects the mobile industry strategically, operationally and financially”.

Like many internet companies, Facebook has a dream to be Google and win a large share of the $600 billion global advertising industry. Consider that just 15 years ago that the market was comprised mainly of TV, print, radio and outdoor. Digital advertising has replaced one 1/3 of that total. The decline of the American newspaper industry, $40 billion in the last 15 years, is equal to Google’s revenue today.

Many fail to realize that the Google AdWords empire is built on a vast infrastructure of software, analytics, and a high quality sales and marketing team. Attempting to copy-paste this model with the help of former Google employees has not yet created the winning Facebook ad model. Facebook hired Indian Gokul Rajaram, Google’s former head of AdSense to mastermind its ad platform, but brilliant engineering may not be enough. Facebook needs to have its own unique value proposition and business model to be the prevailing social network in the future.

Strand Consult studied how mobile operators market on Facebook. Indeed we found that many operators that tried Facebook advertising gave it up for its negligible impact. Further many operators refuse to “pay” for fans and report that people don’t want to buy on Facebook anyway; there are there to hang out with friends and family. In any case we see operators all over the world spending collectively billions of dollars in staff resources and creative/development costs to market in Facebook, but still struggling to demonstrate the value of the platform to their business.

With specific regard to India, we discovered that Tata Docomo is the world’s most popular mobile operator brand on Facebook with over 8 million fans and growing by a staggering 16,000 people per day. Most operators can’t get more than 2% of their fans to like them. Tata Docomo has almost 10%. What is even more impressive is that Tata Docomo manages its Facebook efforts with just 5 people.

Tata Docomo does not advertise, so it does not add revenue to Facebook. In practice, Tata Docomo’s posts will only be seen by a fraction of its 8 million fans, hence Tata Docomo’s wild proactivity to add new fans and build a critical mass that regularly reads and comments on its activities. Facebook is hoping that companies will pay for the privilege to broadcast to its fan through the Reach Generator product, but whether companies will pay up for what they thought was a free and open social network, remains to be seen.

To be sure, Facebook has looked for other sources of revenue such as partnerships. It makes half a billion dollars from microtransactions within social games (Zynga’s CityVille for example), but the gaming industry pales in comparison to advertising. Gaming is one thing that makes Facebook cool for users, and the company has been quick to make deals and acquisitions for cool user-driven technology such as the streaming music service Spotify and photo sharing service Instagram.

Indeed for Facebook to make money in India, and any other country for that matter, it needs to reinvent itself.

Strand Consult has discussed that mobile is the key to Facebook’s future is mobile, and there is no better entry than the mobile browser, where Facebook can own the internet experience. Buying AOL’s mobile patents won’t cut it, but buying Opera, the world’s single most used mobile browser, could be the match made in heaven. Read more in our research note.

We also expect that Facebook could launch VoIP and be a real competitor to Skype, adding real revenue fast to the income statement. This development could have a profound negative impact on mobile operators. Read more in our research note.

Facebook’s experience is not unlike other American companies that are quickly realizing that there is a world outside the USA. Not only India, but countries such as Brazil, Indonesia, Turkey, Philippines, and Argentina, are fast-growing geographies for Facebook where users are young and use a mobile phone.

Given India’s near 1 billion mobile users, it is interesting to think that the next wave of innovation would come not from Silicon Valley, but from India. Consider that India has already upset the world through outsourcing. Perhaps it is ripe now to bring a disruption through mobile.

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