What the Market Still Hasn't Figured Out About Facebook

It’s been a rocky year since Facebook’s much-maligned initial public offering. 
The misjudgment of the company and its underwriters in pricing the stock unleashed a wave of criticism and led many to question whether the company would be able to thrive and grow over time. But Facebook’s just-announced quarterly results allayed many of those concerns, with revenues rising more than 60 percent from a year ago to $2.02 billion, which was above even lofty expectations. Profits were also up, as were the number of accounts, which are now at 1.19 billion users.

What was most dramatic about these results was that nearly half the revenue came from
mobile advertising. The biggest issue for Facebook more than a year ago was whether it would be able to craft a meaningful mobile strategy. Executives such as Marc Zuckerberg and Sheryl Sandberg had promised it would, but now the company is delivering on that promise. Facebook stands to capture 5% of the global market for mobile advertising, which is currently about $120 billion and growing by proverbial leaps and bounds.

Love Facebook or hate it – and there are ample in both camps – its peregrinations are one key indicator of the rapidly evolving world of social media. Anyone who looks at today’s stock market and warns darkly of 1999-like Internet exuberance would do well to remember that countless companies then traded at no revenue or at best, no earnings. Facebook may be trading a high multiple, but it is generating massive revenue and billions in earnings annually. So too is LinkedIn, Yahoo, and numerous others.

There’s no way Facebook could have gone from mobile ads accounting for 16% of revenue to nearly 50% over the course of a year simply by having a good strategy. It is benefitting from a sea change, but it is not creating that change. The explosive growth in mobile advertising is testament to the rapid morphing of our on-line lives away from computers and towards tablets and phones. Whether that change will have as substantial consequences as the initial wave of personal computer adaptation in the 1990s did, that remains to be seen.

What’s clear, however, is that the way people shop and the utility of advertising on mobile devices is different than it was for the computer. Yes, in countries where there is more seamlessly integration between phones and mobile payments, Korea especially, the presence of ads can lead to more frictionless purchasing of goods and services. But as Facebook and LinkedIn executives have both noted recently, you can only saturate users with so many ads before that backfires. That saturation point also isn’t clear, but we all know that if the ratio of ads trying to sell you something and content that you want, need, desire shifts too heavily toward selling stuff, not only do we tune out the ads but we may also tune out the service.

Facebook and the entire social media space therefore confront a challenge: they need mobile revenue because mobile is where people increasingly reside. But unlike a web page that you scroll down and through, mobile devices simply have less physical real estate for ads, and those ads compete more directly with content for our attention. Companies must be ever-careful not to overdo the ads, for legitimate concerns about both the law of diminishing returns and driving people off their sites entirely. They must, in short, constantly remember the famous words of Yogi Berra, “Nobody goes there anymore because it got too crowded.”

The saving grace here is that no one has figured out the balance, the way to make money consistently, or how people we continue to shift their on-line, mobile behavior. And no one will conclusively figure this out, because all of this is in constant flux. Each new company learns from the last new company, and if it was LinkedIn a decade ago, and Facebook a few years ago, and Twitter now, all participants are simultaneously trying to gauge what works best and crafting new systems. Grasping all of it can fee like analyzing a dream while you’re still having it.

As we go mobile, it’s worth stopping for a moment and pondering what the next major disruption will be. Will be it be virtual Google-glass disruption? Holographic projections? Is the singularity near? Twenty years ago, the mobile revolution was hardly contemplated. Twenty years before that, the personal computer was basically a Steve Jobs dream. Twenty years from now, we are likely to be speaking of the next big thing, and it wont be this. Just be prepared; it happening whether we are or not.