Monday, July 2, 2012

Facebook's Future Lies in Mobile

Traders buying Facebook (Nasdaq: FB) looking for a quick pop have certainly been disappointed. But what about longer-term investors? Is Facebook a company worth owning? The answer to that may lie in whether the company is able to come up with a mobile strategy.

On the surface, Facebook looks like a web powerhouse, with hundreds of thousands of apps and sites building on its social network site. But in the mobile world, it looks like just another applications developer. And one that, like others, is dependent on platforms owned by Apple or Google for distribution. Facebook management has recognized this and has made some moves including a series of acquisitions and a new app store as part of its attempt to adapt to the mobile device world we live in.

Data from research firm Gartner reinforces the idea that Facebook had better adapt and quickly if it is to be a profitable company. It estimates that revenue from non-mobile social media will climb to $10.2 billion in 2015 from the $1.3 billion level in 2010. But mobile social media revenue is forecast to rise to $29.1 billion in 2015 from $7.3 billion in 2010.

Clearly mobile social media is a sector in which Facebook has to become a major player. Facebook itself admitted before the IPO that growth in advertising sales isn't keeping pace with the gains in the number of users, many of which are logging on via mobile devices. Facebook sent more than 160 million visitors to mobile apps in April 2012 alone! This is a colossal opportunity for the company and it has to simply find a way to monetize those visitors.

One way Facebook can try to catch up fast in the mobile world is through acquisitions of companies rooted in mobile technology. It has already acquired mobile tech companies Tagtile and Glancee, not to mention Facebook's $1 billion offer for Instagram.

But of course, Facebook has to acquire the 'right' type of mobile technology companies from the myriad of choices out there. Many of these companies use the old-fashioned method of throwing a bunch of stuff against the wall and seeing what sticks. Mobile gaming companies, like Zynga (Nasdaq: ZNGA) and Glu Mobile (Nasdaq: GLUU) use that strategy. Zynga, with more than 290 million active users, spent over $56 million in the first quarter acquiring new users.

Glu Mobile is a leading global developer and publisher of “freemium” games for smartphones and tablets. Some of its most popular games are available now at the new Facebook App Center. It is well positioned in a market forecast to grow to $16 billion by 2015. But it still follows the strategy of building and hoping. Also think of the creator of the highly successful Angry Birds game, Rovio Entertainment. It was another 'build it and they will come' company that had a lot of losers before hitting upon Angry Birds.

It should be mentioned though that Zynga to date has been successful, providing Facebook with many of its most popular games including Farmville and CityVille. In fact, Zynga supplied Facebook with 12 percent of its revenues in 2011, its largest source of income.

Perhaps Facebook could look at mobile technology companies that are approaching the sector from a different angle using predictive analytics. That is finding a particular target audience, such as fans of a particular sports team, and building apps specifically for them.

One company doing that is a small company called Bitzio (BTZO.OB) which has already surpassed the 40 million app download mark. Its entire strategy is centered around licensing media rights of sports and entertainment properties with millions of existing fans and then creating apps and web experiences for these fans. To execute its strategy, Bitzio recently acquired an award-winning animation studio and a mobile games developer. A caveat here...this is a small company, trading below $1 a share, so investors are urged to do their due diligence.

Getting back to Facebook, making Facebook-friendly mobile apps could become even easier if the company decides to develop its own operating system as Apple and Google have done. Rumors of a “Facebook Phone” have been circulating for two years with even more recent rumors of Facebook buying Research in Motion. But obviously such undertakings would be risky for Facebook, especially considering its loss-making mobile business.

Or perhaps Facebook could look at payments as a solution to its mobile revenue problem. Some app developers have already told Facebook they would like to use its Credits virtual currency on mobile also. But Apple's App Store expressly forbids developers from using any other payment system than its own. And Google is not likely to be happy if Facebook moves to oust its payment system from Android applications.

So Facebook is left with a dilemma as to how to prosper in an increasingly mobile world. It's a problem the management needs to solve if the company is to survive and grow profitably in the years ahead.

This aericle was originally written for the Motley Fool Blog Network. Check out my daily articles for the Motley Fool at

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