The (Mobile) Gospel According to Zuck

Facebook ups its game

The shift to mobile has been the biggest overhang for Facebook's share price since its IPO. In a nutshell, users are shifting to mobile but up until this year Facebook never advertised on mobile, so a mobile user was a lost user in economic terms. In Q2 it made tentative steps, with sponsored stories on mobile delivering $0.5m /day in ad revenue. But at the same time Zynga was painting a grim picture of his its mobile ARPUs were half than on the desktop.

To their credit things were rosier last night. Facebook delivered $1.26bn of revenue and 12c of EPS vs. consensus of $1.2bn and 11c. But what was more important was the quality of that revenue. Despite Zynga-driven sluggishness in Payments, Advertising revenue which is the real growth engine showed accelerating from 28% YoY growth last Q to 36% in Q3. ARPU's also ticked up from $1.28 /user to $1.29 as Facebook struck gold with promoted posts in users News Feeds. Ad pricing was +7%, having grown 9% in Q2.

Mobile is showing signs of life

Most importantly though was a marked improvement in mobile. As I highlighted recently, mobile users continued to grow in the mix, but for the first time Facebook seemed to be making real money from them.

Facebook impressed with two data points - firstly mobile ad revenues were $150m in the quarter (from zero six months ago), or 12% of group revenues (for reference 60% of FB users access it on mobile, and maybe 12-13% access it exclusively on mobile). That implies a $600m /year mobile business.

Secondly on the conference call they disclosed that sponsored stories on mobile newsfeeds were running at a rate of roughly $3m /day at present. That implies the mobile business is ramping up to more like $1bn+ (versus group revenues of c$4bn).

Now bear in mind that isn't all new revenue - inevitably it involves some cannibalisation of desktop advertising. But it makes a strong case against the perception coming from Zynga that mobile is an unrelenting negative.

I think that's doubly impressive because - to be frank - Facebook's ad targeting has been lamentable, both on desktop and mobile. My wife is still getting ads for mid-market CRM system Salesforce.com on her news feed (she's a PhD student!) on the dubious assumption that a friend of hers once "Liked" Salesforce and so she must like it. If they can up their game on how to target users (which should be the easy bit for them...) there is clearly more upside here.

The (mobile) Gospel According to Zuck

What was most interesting was Zuckerberg articulating the clearest case for mobile that I've heard him make. He made the following arguments

1. Mobile reaches more people than on desktop.
2. Mobile users check their devices more often than desktop ones.
3. Mobile ads are higher quality and more interactive than desktop (or traditional TV ads).
4. Mobile ads can be more integrated into the device than on the destkop.

This is the first time I've heard him make this case - and a contrast to the somewhat rabbit-in-headlights approach adopted on their maiden conference call. It is a powerful case, but not an overwhelming one. I would make the following points:

Mobile reaches more users: Yes mobile reaches more users than on the desktop, but bear in mind a lot of the incremental news mobile-only users are likely to be those in poorer countries who don't have a computer/internet connection at home. So new mobile users are lower yield.

Mobile users check their devices more often: This is a definite positive. Also mobile ads can only come in the news feed (due to limited screen real estate) which makes them more memorable. My wife's Salesforce.com spam is a good example - I may not like it but I certainly remember it.

Mobile ads are higher quality and more interactive: In theory this is true. In practice though Apple's iAds fiasco has shown more interactive is not necessarily better. Mobile ads are different, but whether they are better is yet to be proven.

Mobile ads can be more integrated into the device: This is the biggest issue because it runs into the issue of Platform Risk. In theory Facebook (and its ads) can be much more integrated into the device than on mobile. Zuckerberg game the example of Mobile-App-Install Ads which push the user towards an app (from the advertiser) on the Android or iOS app store. In practice though there is one big problem with this.

The coming battle over platform risk

The problem is that Facebook does not control the platform. Facebook's mobile apps sit on top of iOS/Android/Amazon &tc. This means it can only be integrated into the device as much as the ultimate platform owner feels like allowing them to be.

This is exacerbated by the fact that at least one of the platform owners - Google - is Facebook's biggest competitor in advertising. It is highly unlikely that Google will allow Facebook to make hay with mobile ad integration at its own expense.

Its been interesting actually how much Facebook has been cosying up to Apple (my enemy's enemy is my friend, right?) with more direct FB integration coming into iOS and OSX in recent updates and Facebook re-engineering its iOS app first. Apple's iAds platform (as I've already highlighted) has had limited traction - in contrast of Facebook's Q3 success. But ultimately Apple too will be thinking about its own interests.

In short on mobile, much more than desktop, Facebook has a real challenge related to Platform Risk, a topic I recently wrote about. Much as Zynga was beholden to the Facebook platform (from which it was quite spectacularly thrown under a bus on last night's conference call), so Facebook is ultimately beholden to iOS and Android.

The best case scenario for them is that this limits the excess returns they can make on the mobile platform. The worst case scenario is that one day Google and/or Apple cut them out of the loop.

Zuckerberg was asked about this issue late on the call and did not give a convincing answer, instead falling back on his script that a) mobile = more users/facetime/monitisation, and b) pointing out that Facebook isn't running apps on its mobile platform its connecting other people's (which isn't going to be much use if one day Apple cut's the phone lines).

To be fair some of these conflicts are still some way in the future. Apple certainly is enjoying something of a love-in with El Zuck. The platform war with Google though is a more immediate threat.