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ad revenues, advertising, App Store, Apple, Daily Active Users, Electronic Arts, Facebook, Foursquare, Gameloft, Geo-location, Google, Location, Maps, mobile, pull, push, The GAP, Waze, YouTube
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7. Facebook will undergo a radical overhaul in terms of UI and appearance to enable it to effectively ‘monetize’ its massive mobile user base – with location and games leading the charge, fuelling further mobile acquisitions.
Facebook is still growing [1] – Monthly Active Users (MAUs) were up YoY to 1.11 Billion (23%) as of March 2013, with Daily Active Users (DAUs) up 23% in the same period to 665 Million. Most tellingly, Mobile Monthly Active Users (MMAUs) jumped a whopping 54% to 751 Million users in the twelve-month period from March 2012-13.
Traditionally, like so many websites and online information services, the firm made its revenue from traditional display and placement advertising, something that its millions of users didn’t find too obtrusive when traditionally accessing the site from a PC or laptop; the bigger screen allowing for ads to be displayed on the comparatively larger layout (up to seven ads per page) without feeling like it encroached on the users’ premium and highly personalized real estate. The trouble is, display ads just don’t work on mobile. With ‘real estate’ on a Smart Phone screen at a premium and potentially slower connection speeds over a radio/mobile network, if you start clogging the UX/UI with interstitials, banner ads and buttons then users will spend less time accessing the site or ditch it altogether.
As more and more users start accessing the site from their Smart Phones and via dedicated Facebook apps (first via HTML5 web apps, though more recently the firm took the decision to ditch it’s clunky web app strategy in favour of dedicated native apps that offered better performance and aesthetics), this has presented Facebook with a massive challenge: how to monetize it’s massive and increasingly mobile user base.
People are still signing up to Facebook, but like the network operators who supply customers the network data connections to access sites and services like Facebook have discovered, all users are not created equal. TechCrunch recently reported that whilst the firm earned an average of $3.50 per user in the US and Canada in the first quarter of this year, that figure dropped to around $0.50 in much of the ‘new’ and ‘developing’ markets such as Brazil and India – and it’s the ‘emerging’ markets where Facebook is experiencing the majority of its growth. As a result, as Facebook gets bigger, the average revenue per user (or ARPU) is decreasing, but its rising costs, not least in terms of staff (the firm now employs 38% more staff than is did last year, with almost 5000 employees on the payroll) and the fact that more and more users are choosing to access the site via their mobile phones means that Facebook earns even less per user than it used to.
But it’s not all bad news. As many analysts have pointed out, there’s no doubt that since going public, Facebook has focused more on making money, with revenue from mobile leaping from next to nothing to $375m a quarter (about a third of its total ad-revenue). A large chunk of that revenue came from the ‘mobile app install ads’ [2] the firm launched last year that allow developers to promote their apps from within the news feed and link off directly to the download page in the Apple App Store and Google Play. This kind of promotion works extremely well on mobile and gives publishers and developers the opportunity to be discovered – and hopefully downloaded – and consequently bumped up the app store listings. As more and more users are accessing the service via mobiles, the mobile app install ads are potentially a key growth area for Facebook; a new way of generating revenue as the platform evolves. The thing is, there are only so many publishers who can afford to pay for the service – and that’s a real challenge for Facebook in terms of maintaining growth on mobile.
Facebook has also made much headway with ‘Facebook Exchange’ – its new technology that allows brands and advertisers to re-target relevant ads based on their browser histories, although Facebook Gifts, the firm’s entry into direct e-commerce, has so far failed to capture the imagination and dollars of users. Similarly, as more and more game developers prioritise Android and iOS as a development and distribution platform, Facebook sees less and less revenue, with both Google and Apple commanding the 30% revenue share from ‘premium’ downloads and in-app purchases from mobile games and apps that just don’t make it to the web.
So what’s next for Facebook? The much anticipated ‘TV-commercial’ style auto-play video ads are yet to make an appearance, whilst the launch of its own mobile ad network is still no where to be seen, suggesting that Facebook is understandably being very cautious about upsetting its users, even when potentially huge revenue is at stake. The softly-softly approach seems to be working right now, but it can’t be too long before impatient shareholders want to see more revenue from mobile, but at what cost to the UX? Where’s the tipping point that will force users to say ‘No’; how much is too much?
As it stands, there are definitely more ads on Facebook, even on mobile, and stats show that they’re not annoying users enough to reduce their engagement (yet)[10]. As long as users don’t feel that they are being exploited or that their data is being unfairly ‘used’ Facebook can continue to spoon feed its user base carefully targeted ads that don’t disrupt the user experience. But that’s not the whole story – it could also use this data to drive revenues from outside the Facebook website and dedicated Facebook apps to make money from its users. If Facebook were to allow off-site and off-app networks to leverage its huge personal data to power ads elsewhere – beyond its own properties – then it could it could drive significant revenue, without risking the immediate wrath of its user base. But how would users react? Would then even realize that Facebook was doing this and more importantly, how would this impact the information they shared with Facebook and with others?
Another potential growth area could be for Facebook to become a mobile games publisher in its own right. According to recent reports [11] the firm is in discussions with various small and independent game developers about publishing titles and sharing a cut of mobile ad revenue for each game or app. With publishing powerhouses such as Electronic Arts and Gameloft commanding the lions’ share of consumers’ attention with million dollar monthly marketing campaigns, it is increasingly challenging for smaller, independent developers to get their new games noticed and downloaded. Using Facebook as a publisher automatically legitimizes a developer and their games, but there would presumably need to be something more to entice developers to partner with Facebook and give away almost a third of the revenue an app of game might generate (guaranteed promotion, placement in a ‘Facebook Mobile App Store’ or some kind of marketing commitment at the very least) otherwise they may question the real value of having a publisher when it is currently very easy to self-publish apps on Apple’s App Store and Google Play.
Ultimately it’s through location that Facebook can seriously start to ramp up revenues and the massive growth in mobile users will stand the company in good stead as advertisers look to leverage users’ location to drive engagement, through carefully targeted promotions and geo-centric (and possibly time limited) offers.
When we look at what people use Facebook for, it’s essentially to share stuff they like (or don’t like) with their peers and to see what their friends and family are up to (where they’ve been or where they are, what interesting stories they’ve read about, what they’ve shared etc.). This could mean sharing a link to a hilarious YouTube clip of a cat in an Abercrombie & Fitch shopping bag, or to post a photo of their child splashing in a puddle in Kew Gardens. The key point here is that people are increasingly using their mobiles to engage with Facebook and connect with their peers and as 4G networks and Wi-Fi coverage becomes more prevalent, one of the barriers to connecting with Facebook via mobile (lag or a slow connection) disappears.
People don’t necessarily use the Facebook ‘check-in’ feature, but that doesn’t mean to say that they’re off the grid. Facebook pretty much knows where most of its users are whether they are connected to the service via a Wi-Fi connection or using their mobile phone operator’s radio network (ever notice that little ‘pointer’ icon appear at the top right of the screen when you boot up the Facebook app on your phone? The app is using your phone’s GPS to locate you. You gave Facebook permission to do this when you signed up and downloaded the app.). If people don’t check in using Facebook (and let’s face it, not that many do), then they might post a photograph they took with their mobile phone using Instagram (100 million monthly active users and counting) and post it to Facebook, or they might check-in to a location using Foursquare and opt to share this with Facebook. Alternatively, they may post a picture of their cup of coffee they’ve just bought with the Starbucks logo on the cup to Facebook, or write a quick post about the fabulously trendy new top they just bought in Banana Republic. They may even hashtag it #bananarepublic. All of this information, or personal data can be used to build any number of very compelling use cases which advertisers, brands and services are be falling over themselves to leverage.
Here’s an example:
1. Steve ‘likes’ The GAP. He doesn’t just buy the odd t-shirt when he’s bored at lunchtime; he has actually ‘liked’ the clothing store on Facebook. He has also signed up to receive ‘special offers and promotions’ and recently received an email voucher to spend online or in store giving him 30% off his next purchase.
2. It’s the weekend and Steve is out with his fiancée Laura in Richmond and is taking junior for a walk in his stroller along the banks of the River Thames. He’s just taken a really cute photo of his offspring eating his first ice cream using Instagram and has tagged the location using the Foursquare API. He’s just shared it with his friends and family via Facebook using the Facebook mobile app on his iPhone.
3. Junior needs his diaper changing (Junior’s bottom erupted whilst Steve was carrying him and his new GAP shorts are a total mess) so whilst mummy disappears to clean up baby, Steve opens up the Facebook app on his iPhone 5 to see what his friends are up to and see if anyone has posted any comments on his snapshot of junior eating ice cream. The first thing he sees is a special ‘members message’ informing him that he can now purchase another pair of those relaxed fit chino shorts he bought last month from the GAP store located on Richmond High Street for half price. This is a limited time offer and needs to be redeemed within the next few hours. All Steve has to do is download a special voucher directly to his iPhone and show it to the sales assistant in-store and he’ll save £12. There’s even a link to a map within the message showing him exactly where the store is located and the quickest way to get there.
4. It starts to rain. Steve clicks on the link, downloads the voucher and heads to The GAP store on Richmond High Street with mummy and baby in tow to purchase some new shorts.
5. Once in the store, Steve buys two pairs of shorts and if he shares his purchase with his friends and/or checks in at the GAP store using Facebook he gets another voucher entitling him to 25% off on his next online order. If he invites his friends to ‘like’ The GAP on Facebook, he’ll be eligible for even more special offers, promotions and money off deals.
6. Steve is happy. He’s no longer covered in baby crap and he’s got two new pairs of shorts for the price of one. He’s already wearing a new pair (the soiled ones are wrapped up in a GAP bag and are now hidden from sight in the bottom of the stroller). And most importantly for Facebook (and The GAP), he doesn’t feel exploited or that his data has been compromised in any way. In fact, he’s grateful.
OK – so give or take a few minor technical details, the above use-case isn’t a million miles away from being a regular occurrence – technically it’s all possible – it’s the business processes, rules and commercials that need some significant thought. The biggest inhibitor to ‘passive’ or ‘always on’ location is currently down to the inadequacy of current hardware and more significantly, user concerns regarding privacy. Any app or service that utilizes a phone’s GPS not only drains the battery significantly, but the majority of users just aren’t comfortable with the idea that their every move is being constantly tracked and potentially recorded or logged (the fact that it actually is, due to cell phone signal tracking, CCTV cameras etc. is neither here nor there).
The real issue with geo-location is that to give customers peace of mind, it must be ‘pull’ rather than ‘push’ – in other words, a user must opt to use it selectively, rather than it being pushed to them automatically. This way of using geo-location also saves the battery life too. The thing is, even if Steve has The GAP app. installed on his phone, unless he’s opted to allow it to track his movements (and drain his battery), The GAP are relying on him to boot up the app. frequently and often – in order to inform Steve of the great new promotions and offers they are currently running. The thing is, Steve just doesn’t feel motivated to open up The GAP app. very often at all, especially when he’s out and about with his family. Of course, The GAP app. can send Steve promotional messages and alerts, but he turned these off ages ago as he was fed up with being ‘alerted’ every day. And here’s where Facebook comes in.
Facebook is currently one of the most utilized apps on both iOS and Android. The statistics [12] speak for themselves; worldwide, over half of Facebook’s 1.1 billion users log in each day, spending an average of 20 minutes per visit; almost half (48%) of 18-34 year olds check Facebook as soon as they wake up and a whopping 680 million users worldwide connect to the service using their mobiles.
A more detailed look at what’s going on in the UK provides further insight. The Daily Mail newspaper recently ran a story revealing how UK smart phone users, on average, check Facebook at least 14 times a day [13] and that Facebook is by far the third most popular app. behind email and the web browser. The report went on to say that 79% of smart phone users check Facebook within 15 minutes of waking up – with many admitting that is has now become part of their morning ritual. The report went on to say that the average visit via a smart phone lasted two minutes and 22 seconds, with users spending on average half an hour catching up with friends and sharing content on their mobiles every single day. Around half of Facebook users access the site whilst out and about, with the gym (48%), waiting for or preparing a meal (47%), or waiting for a movie to start at the cinema (50%) proving to be key ‘Facebook time’ locations or activities. Half of that time is spent browsing newsfeeds, with messaging friends and posting updates the second and third most popular activities. Interestingly, around half of Facebook users play games via the service on their phones every day.
Facebook is already a major part of millions of peoples’ lives and the potential in terms of the personal data the company has collected is quite simply staggering – and therefore hugely attractive to brands and advertisers looking to exploit new technology and social behaviours. It’s not a question of if Facebook will start to leverage this information, but more a question of when, how and how much it’s willing to share.
Facebook is currently at a cross-roads in terms of where it goes next; it’s no longer the scorching hot start-up that’s doubling in size every year and it’s a long way from being the corporate monster that’s grinding out annual revenue increases through exploiting its loyal user base to increase shareholder value. So far, the firm has managed to successfully navigate the increasingly choppy waters of convincing shareholders that it’s moving in the right direction (albeit slowly) and building solid value without compromising the user experience. The key challenge for the firm in the longer term is to figure out how it can remain true to its users and maintain the health of its community, whilst at the same time demonstrate that it really can increase ARPU from at least some carefully considered sections of its 1.1 billion user base. By focusing on mobile (and essentially geo-location) and becoming more involved in the games space, it should be able to meet increasing demands from shareholders and analysts and continue to satisfy its user base.
Becoming a mobile games publisher is just the first small step to realizing some of the huge potential presented by increasing mobile usage however. Introducing more geo-centric services could prove more challenging, but there’s certainly no lack of scope for innovation when you bring location based features into the mix; just look at what Red Robot Labs have managed to achieve by combining location with the traditional ‘Risk’ gaming concept [14]. Of course, Facebook could just acquire Foursquare and use it as a testing ground for more ambitious geo-centric commercially lead activities, and this shouldn’t be ruled out as an increasingly attractive option.
The ‘pointless’ check-in service generated a paltry $2 million in revenue last year and like Facebook has recently had a hard time justifying its potential worth [15]. If recent analyst rumours are to be believed, Foursquare is running out of time and money and could be sold for as little as $50 million by the end of the year, considerably less than the $71 million that investors have ploughed into it and a fraction of the estimated $550 million valuation made back in July 2011.
In theory at least, it could be a good fit. Foursquare’s main challenge is that it just doesn’t have enough users or traffic to make it an attractive proposition for advertisers. Most worryingly, the service is flat-lining in terms of usage, averaging between 2.2 million and 2.5 million monthly uniques for the last 18 months. The firm did manage to acquire 15 million users in 2012, taking the total number to around 30 million and the app has so far generated three billion check-ins to date. But the real challenge, is not only how to monetize these users, but how to keep them engaged and coming back – a problem that Facebook just doesn’t have. The original incentive for users to check-in using Foursquare was the opportunity to become ‘mayor’ of certain establishments, stores, restaurants or locales and this would allow them to enjoy very specific limited promotional offers, like a free dessert, half-price coffee etc. The thing is, merchants just didn’t buy into it – and they still aren’t buying into it, because the numbers just don’t add up.
Facebook could help change this however; it has the user base, it’s users are increasingly accessing the service via their smart phones and it needs to start leveraging location and building out viable use cases for its advertisers. In order to do this, it needs maps, but not just any old maps, it needs maps populated with real people and real data. Facebook was rumoured to be more than interested in social mapping platform Waze, the real-time traffic service that was recently acquired by Google for an eye-watering $1 billion. This acquisition was regarded by many as a counter measure to stop it falling into the hands of Apple or Facebook [18].
Waze currently boasts 50 million users (gaining 20 million in the last nine months or so) and has so far managed to successfully utilize its unique crowd-sourcing formula to create a product that works extremely well, gaining strong traction amongst its loyal user base. But it’s not the users that Google was interested in (it’s own mapping products have plenty), it was the data. Just in case you don’t now what all the fuss is about, Waze isn’t just another detailed map app that details roads, railways and rivers; of course it has these and allows users to search for specific locations, stores and services, but it also cleverly sucks in and aggregates real-time user data (location, average speed, traffic, accidents etc.) and uses it to build out ‘live’ maps that calculate the most efficient and quickest route to a specific destination. Although the firm has yet to really start monetizing this information, it recently launched its own location guided ad platform for local business owners and big brands that wanted to attract the attention of passing drivers who might just fancy a dough-nut or a burger, need a hotel or just fill up with gas.
But this is just the start. Geographically contextual advertising is going to be huge and it therefore goes without saying that anything to do with advertising – and specifically ‘local’, geographically ‘native’ advertising – is something that the world’s largest advertising business is very interested in, hence Google were happy to snap up Waze so quickly and for such a comparatively large sum.
In fact, ‘local’ advertising is big right now – and it’s about to get a whole lot bigger, with some analysts predicting that it will be worth over $9 billion by 2017 in the US alone [20] – and this is precisely where Facebook needs to be if it is to even begin to challenge Google for advertising dollars in the future. To this end, Foursquare shouldn’t really be considered as a rival to Waze – it doesn’t have live traffic updates, but it does have a lot of varied, rich and valuable data collected by real people which is used to give geographical context to a variety of different apps and services. It’s no coincidence that Foursquare’s API is utilised by companies such as Instagram, Evernote, Garmin, Vine and even Waze itself. What is more, there are currently around 40k developers already using Foursquare’s API, helping the firm to build out ‘live’ maps that are richer and more dynamic than anything else commercially available.
Could Facebook acquire Foursquare some time soon? It’s really not a matter of if, more a case of when and at what price.
[1] http://techcrunch.com/2013/05/17/facebook-growth/
[2] http://techcrunch.com/2013/05/01/facebook-app-install-ads/
[5] Mashable – Facebook Mobile Ad Revenue Expected to Top $2 Billion This Year
http://mashable.com/2013/06/13/facebook-mobile-revenue/
[8] Bloomberg – mobile ge- tracking app in the works (use policy) – http://www.bloomberg.com/news/2013-02-04/facebook-is-said-to-create-mobile-location-tracking-app.html
[9] Shopkick – http://www.businessinsider.com/shopkick-iphone-app-demo-2010-8#
[10] http://techcrunch.com/2013/01/30/facebook-users-dont-hate-news-feed-ads/
[12] http://www.statisticbrain.com/facebook-statistics/
[14] www.RedRobotLabs.com
[15] http://leaderswest.com/2013/05/18/infographic-is-the-value-of-foursquare-overstated/
[16] http://www.businessinsider.com/analyst-foursquare-will-fail-by-the-end-of-2013-2013-1
[17] http://pandodaily.com/2013/06/18/is-waze-overvalued-or-is-foursquare-undervalued/
[18] http://marketingland.com/googles-1-billion-waze-acquisition-to-be-given-antitrust-review-49499
Wellsers.com 
http://www.inc.com/erik-sherman/foursquare-pinterest-and-tumblr-monetization-strategy.html
More info on how Foursquare is now re-inventing itself as a B2B location/data company, but is coming under increasing threat from Facebook, Google etc.
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