Why will Facebook make money?
The biggest problem at the time of Facebook Inc (NASDAQ:FB)’s IPO was that its price was not justified considering its monetization policy. Let us look at how Facebook Inc (NASDAQ:FB) will make money and also turn out to be a good investment.
Facebook Inc (NASDAQ:FB)’s continuous efforts and smart strategy are earning the company profits. Advertising is a major contributor to the company’s revenue; this is the reason why mobile advertising has also been introduced to its customers. For Facebook, 88% of the revenue comes from web and mobile advertising, while only 12% comes from payment and fees.
The biggest advantage is the company’s high user base of around 1.1 billion; the company takes advantage of the user data to promote other company products. Suppose a user has updated his status as a fitness freak, this information is used by advertising companies to advertise products related to the gym on the user’s screen. There is this mutual relationship wherein Facebook gets paid for advertising, and the company can use the database and its information for potential customers. Mobile advertising is yet to be fully explored by the Facebook. Success on this front will generate significant revenues as the number of users, particularly in Asia, is increasing at a great pace. Second-quarter 2013 results shows that there has been 83% increase in revenue from Asia, compared to 44% in the US.
Payments and fees are the other area that generates revenue for Facebook. This is mostly from game-making companies like Zynga. Smartphone and mobile users contribute a majority of the company’s payment and fees revenue. All this boils down to the fact that an increase in daily active users will increase the company’s advertising and payment and fees revenue. The graph below shows that there has been 26% increase in the number of daily active users from second quarter 2012 to second quarter 2013. Asia, being the greatest contributor to this increase, shows that there is still huge opportunity for Facebook to take advantage of and monetize the opportunity.
Google to face tough battle
Google Inc (NASDAQ:GOOG)’s advertising and other revenue, such site and network revenue, has increased by only 20% from second quarter 2012, as compared to that of Facebook, which has increased by 61%, to $1.6 billion, from last year. Moreover, Facebook’s mobile ads have generated 41% of revenue for second quarter 2013, up by 14% from second quarter 2012. This has affected Google Inc (NASDAQ:GOOG)’s and Yahoo! Inc. (NASDAQ:YHOO)‘s earnings, which came in lower than the expected. This is particularly because users are shifting to wireless internet devices and anything which is easily accessible by their smartphones or iPads is what they are aiming at. Facebook is a winner here because it has attracted users because of its unique customer-capturing strategy, wherein users keep logging in to the site out of sheer curiosity. Moreover, Google Inc (NASDAQ:GOOG), whose biggest strength was internet search ads, is not user-friendly on mobile devices as users are finding it difficult to click the search on their mobile.
