Given that I covered a lot of elements of Facebook’s business last time around, I thought I’d try to take a slightly different tack this time. Firstly, look at this dramatic transformation in Facebook’s desktop versus mobile business, in three charts:
I shared a version of this chart last time around, but this time I took it further back in time to show the rapid growth in browser-based ad revenue up until early 2012. What’s so striking to me when you look at 4-quarter trailing revenue (which smooths out the cyclical bumps) is that browser-based revenue growth basically ground to a halt right as Facebook went public, and right as it introduced mobile ads. Now look at this one:
This chart shows average revenue per user from ads, which is useful because the overall revenue growth number is driven by user growth too. This strips out that effect and lets us look at ad ARPU exclusively. This time around we can see that browser-based revenue per user actually basically stopped growing much earlier than aggregate browser-based ad revenue, way back in early 2011. Browser-based ad ARPU was $1.05 in Q2 2011, and only got above that level again in Q4 that year, and Q4 is always higher than other quarters. What’s curious is that Facebook was so cautious about mobile advertising even as it must have started to see these warning signs about browser-based usage and the associated ad revenue at least a year before it finally launched mobile ads. It certainly seems as though it was the IPO process, and the negative reaction to Facebook’s then nonexistent mobile business, which finally prompted Facebook to do what it should have been obvious that it needed to do months earlier. If Facebook hadn’t launched mobile ads when it did, it’s quite possible that overall revenues would actually have stagnated or even begun to fall later in 2012.
Unless, that is, you believe that there might be a causal link between the rise of mobile advertising and the decline in browser-based ad revenue. The same advertisers, after all, spend on both platforms, and it’s entirely possible that some of them just started shifting spend from one to the other as mobile ads became available. As a result, demand for browser-based ads likely fell, reducing prices and therefore reducing ARPU, even as rates rose rapidly on the mobile side due to the more limited inventory and high demand. This seems to make a bit more sense, since the number of people who use both the browser-based and mobile app versions of Facebook continues to climb:
What’s odd, though, is that Facebook appears to be less of a daily habit on the mobile than it is overall. Instinctively, you’d expect mobile users to be checking Facebook more regularly than browser-based users, because it’s always with them in their pockets or purses. But that doesn’t actually seem to be the case:
The two are converging slightly, to be sure, but the percentage of overall monthly users who use the service daily is higher overall than it is among mobile users. That’s a bit odd, but it lends further credence to the fact that ad rates rather than usage are driving the mobile ad revenue line up so quickly, and conversely driving down browser-based ad revenues.
Facebook is becoming a one-trick pony again
Facebook’s mobile advertising rise has been phenomenal, as we saw above. But the risk with the current growth in both mobile advertising as a percentage of ad revenue and with the growth of ad revenue as a percentage of total revenue is that Facebook is becoming a one-trick pony. Hence the push-back on the last couple of calls on the idea that app-install ads make up the vast majority of mobile advertising at Facebook. Management was at pains once again to point out that although it’s a healthy and growing business, it’s not that big (yet). In other words, even if Facebook is increasingly becoming a one-trick pony, Facebook would like you to understand that that one trick is really several different tricks, only one of which is app-install ads. That’s smart because app install ads themselves have a natural ceiling and may soon begin to approach it, especially as competitors enter the market. But Facebook still really needs a second trick. Google, the other major business which generates about 90% of its revenue from ads, is going the other way, with a growing “Other” category driven by the Google Play store.
For part of its history, Facebook looked like becoming a two-tricky pony, as payments drove an increasing proportion of overall revenues. But over the last couple of years, the proportion coming from non-ad products has rapidly dwindled again:
In some ways, Facebook has the same fundamental challenge in payments as it did in advertising – it doesn’t have a mobile payments product, and essentially all its payments revenue today comes from desktop games. In fact, Facebook’s payments revenue as a proportion of total revenue maps very nicely onto the total revenues for Zynga, which accounted for the vast majority of Facebook Credits revenue in its heyday (no pun intended):
Hence the interest in a mobile version of payments, and the hiring of David Marcus from Paypal to run this effort (though ostensibly running the Messenger product for now). The second coming of payments will be a lot like the first one way, but very different in another. On the one hand, Facebook still seems intent on streamlining the payments process on behalf of third party payments companies rather than creating its own alternative payment system. Early trials and Mark Zuckerberg’s remarks on the earnings call bear this out. But the big difference is that the focus will shift from virtual goods to physical goods.
The coming hit to profits
Lastly, much was made this quarter of the meteoric rise in profits at Facebook. This is indeed an impressive result, although slightly less impressive than it seems because of an obscure impact from a leased data center Facebook first planned to abandon last year and now has reoccupied, triggering a $117 million bump in cost of sales last year and a $31 million drop in cost of sales so far this year.
But neither Facebook’s acquisition of Oculus VR nor its acquisition of Whatsapp had closed before the end of the quarter (though the Oculus acquisition did close this week), and Facebook’s management gave shockingly little detail about the impact to its financials from the two acquisitions on the earnings call. Neither business has any revenue today, but both likely have climbing costs as they scale up and invest in product development. Other than talk of stock-based compensation, there was almost no information in the official earnings release or on the call about the financial impact from these two big acquisitions. How much of a drag will Oculus and Whatsapp be? Neither has many employees, but it sounds like Facebook plans to invest heavily in both in the coming months, but doesn’t expect any revenue from the foreseeable future. I’m curious to see what happens next quarter and whether Facebook provides any more information.
The rational for the Oculus acquisition did become a bit clearer, with Mark Zuckerberg talking about how Facebook essentially missed its chance to be a major player in smartphone platforms, and how it essentially doesn’t want to miss the next round of interfaces and platforms (as I discussed here).