Research Notes

The Mobile Future of Facebook

At Strand Consult, our job is to look into the future and make an assessment of how today’s world will change. In this article we discuss the future of Facebook, what past experience of the web means for Facebook, what Facebook can do to get success, and what value Facebook can create.

Let’s put Facebook within an economic context of the internet industry that emerged about 15 years ago. We can look at the evolution of the industrial revolution to understand what has happened with the information revolution. When a new industry is founded, such as oil, automobiles or telecommunications, there are many players. After a time, the players consolidate. A single monopoly player, or perhaps an oligopoly, results. From that point, the product or service becomes commoditized. Think of your utility company.

The role of labor is also transformed with each economic revolution. In the 18th century people left the country to work in the cities. In the 19th century we saw labor mechanized in an unprecedented scale in factories. In the 20-21st century, we see labor transformed again by software and computing.

The same transformative economic process has happened in the internet industry as it has for other industries, only the timeline has been compressed. The web exploded in the late 1990s with many portals and search engines and later with social networks. Google emerged as the monopoly for search, Facebook for social networking.

With regard to labor, we can say that Facebook is the world’s largest sweatshop. One billion people create content in personal profiles that are used to sell advertising. Internet scholar Nick Carr calls it “digital sharecropping”. Like a farm where people work the land in exchange for lodging and food, people get access to the Facebook platform for free in exchange for making a profile and entering their personal data. User profiles are the gold, or the digital produce, of the Facebook farm which is provided to advertisers.

Facebook’s advertising ARPU is dismal. Mobile operators do a better job monetizing their users.
To understand the world in which Facebook operates is to understand the global advertising industry. Consider that just 15 years ago that market was comprised of TV, print and radio. The decline of the American newspaper industry, $40 billion in the last 15 years, is equal to Google’s revenue today. Facebook hopes for some of the global advertising pie.

Facebook also 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.

Facebook has tried hard to avoid the MySpace effect, the danger of becoming the uncool nightclub because your mother shows up. As such Facebook has made deals and acquisitions for cool user-driven technology such as the streaming music service Spotify and photo sharing service Instagram.

The internet paradigm has evolved from portals to search engines and now to social networks. Mobile is obviously the next paradigm. Consider that half of the world’s Facebook users access the platform with a mobile device. Users don’t interact with ads the same way on a mobile phone as they do on a desktop, so advertisers’ ROI is lower.

This development underscores the challenge that Facebook has with mobile ads, though revenue on mobile has rallied in the last quarter. The bigger issue is that the majority of Facebook users are in the developing world, and they access the social network with a mobile phone. These users are not the target audience for Facebook’s current advertisers. Copy-pasting ads from the USA to target users in the developing world is not an option. Whether Facebook can find appropriate advertisers and a business model for emerging markets is an important question.

Facebook’s most recent financial quarterly disclosure noted its dismal ARPU for North American users of $3.40 and a paltry $.047 for the rest of the world. Such a low ARPU underscores Strand Consult’s assertions that Facebook needs to explore non-advertising methods to monetize its platform. Facebook has a huge unexploited opportunity with communication services.

People buy data packages from operators to access Facebook, but they could just as easily by the data package from Facebook in an MVNO arrangement with an operator. We can’t think of any operator in the world that would not want Facebook as a wholesale customer. Facebook has already implemented a call button. A full-blown Skype clone on Facebook should not be far behind.

Facebook needs a mobile browser.
One more important area for Facebook to explore is the browser. The browser controls access to the internet. Browsers are important on mobile phones just as they are on computers or tablets.

The world’s single most used mobile browser is made by Opera, a Norwegian company that monetizes its browser by selling it to mobile operators. By purchasing Opera, Facebook will immediately gain commercial relationships to many of the world’s largest mobile operators. The mobile telecom industry itself is more than $1 trillion in turnover, larger than global advertising.

Opera does not only have one, but a number of browsers that work across many platforms including feature phones, smart phones, tablets, PCs, TVs, set-top boxes etc. In practice, Facebook could launch their own browser if they wanted to, just like Yahoo is currently doing. If Facebook purchases Opera they will from day one own a browser that is already installed on many different devices across the whole world. Yahoo on the other hand will need to convince all their customers to try their new browser.

With their purchase of AdMarvel two years ago and more recently Mobile Theory and 4th Screen Advertising, Opera has ensured that they are well placed on the mobile advertising market. This is a good position that Facebook can further expand and also a very interesting part of Opera’s business that can take advantage of the mobile traffic that Facebook already has.

Opera has built a very successful App Store which Facebook can use to expand the distribution via Facebook. Perhaps most interesting to Facebook with its saturated Western markets is that Opera monetizes its activities in India, Russia, Brazil, Africa and Asia, places where Facebook has little to no revenue.

Facebook and Opera would be a match made in heaven, and it a future that Facebook should acquire as soon as possible.

To learn about the mobile future of Facebook and what it means for operators, get our 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“.

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