Facebook’s Week In
Wall Street Hell
This week Facebook did a virtually unprecedented thing. In the middle of its IPO roadshow it modified its S1 filing in reaction to questions it had been being asked by analysts. The modification I refer to stated that Facebook wanted to acknowledge a trend; that trend is the declining ARPU (average revenue per user) being seen in its current quarter. This trend is being driven, Facebook said, by the growth in its usage on mobile platforms and its inability to monetize those platforms in the same way, or at the same rate, as its desktop/laptop offerings.
The previous iterations of the S1 had all contained the possibility of this trend. Even the likelihood of it. But the actuality of the trend was noted here for the first time in the S1.
The Street Knows The Truth
This is a company about to sell shares at a multiple of earnings that dwarfs companies with massive revenues, profits and growth rates – like Apple’s. Facebook’s multiple is of a size that is traditionally only justified by high growth rates. And now “the street” has picked up on the fact that the rate of revenue growth is declining as traffic migrates to mobile. It is even feasible, if this rate accelerates that revenues could fall in absolute terms, as they did in Facebook’s most recent quarter. The street is not happy.
This is a historic event. A high growth company entering its IPO whilst its revenue growth decelerates amidst a huge and structural change in the usage patterns of its product is not the norm. Especially when it is the biggest IPO in US history.
Amidst the rhetoric that the IPO is over-subscribed, one wonders if the shares can possibly be worth what people are being asked to pay for them. I am not a stock analyst but I think buyer beware is not an unreasonable conclusion to draw from these events and the fact that more than $5 billion of insider money is selling at the IPO price may mean that there are some smart insiders who know the risks.
It isn’t about Facebook, or the IPO, its about Mobile and the future.
Yet, this weeks events are about more than Facebook’s IPO and the issues are far from new. Here on TechCrunch we have documented the impact of the rise of mobile and the end of Web 2.0 for some time, stressing that Web 2.0 era companies, running SAAS like cloud services, will be threatened by Apples success in driving large numbers of us to primarily use mobile devices, in an app-centric, message-centric world. In Google’s case they are contributing to and suffering from the problem simultaneously through the success of Android.
On August 27th 2011, I wrote “Smart Mobile and the Thin Cloud” in which I said that there is a trend in play that:
“…will transform the entire software ecosystem over the next 5 years. The changes will be so dramatic that the current discussions of a bubble will appear silly. Huge companies will fail and even bigger new companies will be formed”.
The article predicted Facebook will be challenged by the growth of mobile devices and the impact of that on the way users interact with data.
On January 26th this year, in “Google, Look out Behind you” I said:
“Apple has a platform that will soon be numbered in the hundreds of millions. Every device has communications built-in, personalization built-in, media capture built-in. And with iCloud, there is now a place to store the output of each device. How relevant is the Facebook hosted social graph in that world? How relevant is the web ecosystem that Facebook connect has helped penetrate? It seems likely that Facebook will have many of the same challenges as Google as it contemplates the rise of Apple, and the rise of mobile.”
A few days later – on February 4th – in “Facebook – Run from the Bulls” I said:
“Google’s present – and Facebook’s future – involves the painful fact that the very success of mobile platforms in helping human beings be productive, on the go, has a negative impact on the desktop-based advertising programs of the past 10 years. Mobile growth impacts web advertising revenues, except of course for Apple who make money from hardware and software and so benefits from these trends. The reason is simple. We do less ad-centric activities on mobile than we did on the web. And we are less likely to click away on an ad when we are focused on a specific goal on a largely single window device.”
Then, on April 15th in “The Mobile Paradox” I wrote:
“I believe what we are seeing here is the start of a secular trend that represents nothing less than the end of the web 2.0 era where we all consumed services through a browser on a computer. Replacing that era is a new, app-based, message-centric mobile Internet. In this new era the essential unit of advertising (a page based ad, whether text, display or anything else) is simply the wrong monetization vehicle. Something new has to emerge.”
Death or Mobile?
Facebook is not alone in being threatened by these trends. Google has missed its “Cost Per Click” numbers two quarters in a row now – for similar reasons.
The real question is whether Facebook and Google understand the scale of the problems and how to address them.
There are only two possible answers.
I think 1 is more likely than 2.
Why the belief? Facebook did another thing this week that is highly relevant to this issue. It launched its own app store. Facebook’s app store enables an app developer on either Android or iPhone to use Facebook to trigger users to visit the iPhone app store, or the Google Play app store, and install an app. Facebook becomes possibly the primary way that happens. It may drive millions of app installs across many platforms. These installs are not free, they are pay to play.
I think of the app center as providing Facebook with a new type of advertising format – an ad, with an action (an install), and a price on success.
As Larry Page noted on Google’s earnings call this quarter, mobile demands new types of ad format. He cited “click to call” as an example. Both Facebook and Google will begin to evolve ad units that are a better fit with the user experience on mobile, and ones that reflect the customer goals or the advertiser better. So far, ad formats on mobile have been simply copies of tried and trusted web formats, poorly suited to the new environment.
Option 2 – death of the Web 2.0 giants – only seems to be likely in a scenario where these companies fail to understand that their web pasts count for nothing in this new mobile world. This week, if anything, has served as a huge reminder of that.
Facebook (and Google) will most likely, by building or buying, evolve their monetization strategies to better suit the mobile future. It may take time, it may be painful, they may even fail. But try they will and try they must. Facebook 2.0 will try to kill Facebook 1.0 and Google 2.0 will try to kill Google 1.0. It’s not a good time to be going public, or to be public. But, mobile is the future – they can’t live with it, and they surely can’t live without it.