What Facebook’s IPO filing means for the telecoms industry

As the industry awaits Facebook’s IPO, Telecoms.com takes a look at what the social networking site going public will mean for the telecoms industry.

The social networking site revealed in its documents that it currently has 823m unique users per month, according to its December 2011 figures, and half of that figure – around 430m – are using the site from a mobile device, which is larger than the global Android user base.

The site saw $3.74bn gross revenue for 2011, with $1.7bn operating profit before tax and $1bn net income, marking a healthy margin of around 27 per cent.

However, there is still vast scope for growth and, with an influx of capital expected by floating on the stock market, commentators are suggesting that the most promising avenues for the firm to invest in to stimulate further growth are in mobile and in-app purchases.

Aggressively expanding its mobile efforts is not going to be plain sailing for Facebook. Net advertising income from a mobile user is currently less than for a PC-based browser user for Facebook because the site does not display third-party advertising in either native or web mobile applications. It has been suggested that the firm may even need to working out revenue share deals to gain support from operators and ensure they do not feel threatened by its services, such as Facebook chat service displacing revenue streams from SMS.

Despite that, the proliferation of smartphones represents a huge opportunity for the site. In developed markets there is scope for Facebook to increase revenues from services that can be used on the move, such as location-based services and coupons. But, the firm is aiming to appeal beyond smartphone users in developed markets.

In many emerging markets, such as Africa and parts of South East Asia, growth in internet penetration via desktop PCs is modest. However, while they are not investing in PCs, many consumers are investing in feature phones, and Facebook can capitalise on the opportunity that presents.

For example, in October last year, Facebook introduced a version of its platform that can be embedded on the SIM. SIM card manufacturer Gemalto developed the offering, which is targeted at the mass market, and the Facebook software application is embedded inside the SIM, allowing users to access core features from the phone’s main screen, through a cascade of menus

“Right now people think the Facebook mobile experience is primarily for smartphone users but Facebook wants to be accessible on every device, not just smartphones but lower-end handsets as well. That means making Facebook a de facto part of handsets that are sold in emerging markets,” said Michael Gartenberg research director at Gartner.

The firm is also in a strong position to offer marketing services beyond display advertising. There is a mass of consumer data accessible via the Facebook platform, and third parties are also integrating Facebook functionality into their websites. But perhaps the most interesting development is the volume of revenue Facebook is seeing from in-app purchases, through services such as games, according to Adrian Drury, practice leader and senior consultant at Ovum.

“One of the most notable things we’ve seen is the volume of revenues coming from PAYG services in the platform, which is brought about by its exposure to [social network game developer] Zynga,” he said.

“Users are paying for premium content and features through these games and apps, and everybody is surprised by just how much money that is generating for Facebook.”

But it will be a challenge to maintain this pace of growth. Becoming a public company, the firm will now have the added burden of a responsibility not just to its users, but also to shareholders.

According to Fred Huet, MD of telecoms and media consultancy Greenwich Consulting, Facebook has acknowledged in the past that it needs to generate more revenue per user, and the floatation is only going to increase that pressure. Huet explained that the current model of the Facebook platform playing host to third-party games and apps is overly dependent on other industries and players moving to Facebook and finding ways to make money from the site.

“Now it is going to be quoted, it will probably have to take a little bit more of a driving seat in that space as well. It will surely continue the platform play – providing third parties with a great way to make money, while making a cut for itself. But it will also have to do a bit more on its own—and this means developing more products in-house for its own platform.”

However, Gartner’s Gartenberg does not believe that the IPO will significantly impact the way that Facebook does business. He said that the site will continue operating largely as is, because if the user and the user experience were no longer the priority, Facebook would suffer and so, inevitably, would its shareholders.

“Zuckerberg still has a controlling interest within the company, and they are going to pursue the market as they see fit,” he said.

He also argued that it has been taking into account shareholder considerations for a few years now, with venture capitalist firms such as Elevation Partenrs, recently investing in the site. However, he conceded that there will be more pressure on the company to drive higher levels of revenue via advertising, particularly in mobile apps, where it currently has no display advertising.

“It’s hard to believe that’s going to remain that way forever, but at the same time, it has to strike the balance between advertising revenue and becoming annoying to consumers; too much advertising with no targeting ends up doing more harm than good. It needs to focus on preserving the user experience on Facebook, because if that begins to change then they will have bigger issues.”