Facebook Inc (NASDAQ:FB) recently announced that over 100 million people are using its Facebook for Every Phone application. The application is aimed at emerging markets, giving Facebook an important head start on the smartphone push in those nations.
An Advantage
Mobile ads account for around 30% of Facebook Inc (NASDAQ:FB)’s ad revenues, so it’s making important inroads. That said, it may be in a better position than some of the larger competitors in the mobile space because of the nature of its product. People use Facebook to keep tabs on their friends and family on a regular basis, which leads to frequent visits. Search giant Google Inc (NASDAQ:GOOG), on the other hand, needs people to search for things to make money.
That’s becoming increasingly problematic in the mobile space. Google itself warned of this in its annual report, highlighting the fact that mobile search often happens via applications and that competition in the mobile space has kept ad rates low. This was on clear display when Google announced second quarter earnings.
Google Inc (NASDAQ:GOOG)’s search volume was up, which kept revenues and profits heading higher. However, the amount it charges per ad slid 6% in the quarter, that’s on top of a 4% decline in the first quarter. Google shares, meanwhile, are trading near all-time highs with a price to earnings ratio of around 27. While not outlandish by any means, it does mean that investors are expecting continued growth. If declining ad rates take a toll on the bottom line, investors could jump ship fast. Google shareholders should be wary of this trend.
Reaching New Customers
Notably, Facebook Inc (NASDAQ:FB) has taken a forward-looking approach with regard to emerging markets, while still building its mobile position in the developed world. In developed markets customers are accessing Facebook with smartphones and the company is trying out new advertising methods. However, the smartphone push in emerging markets is in its infancy at best. Instead of waiting for the phones to enter the market, Facebook has simplified its product to work on older cell phones.
It now claims to have 100 million users of its stripped down Facebook Inc (NASDAQ:FB) app in countries like India, Indonesia, and the Philippines. That’s building brand equity in important markets before the competition can get there. As smartphones become more prevalent, these users are likely to download a Facebook app to keep their social connections. In this way, Facebook is something of a vital service.
Although the company’s shares only recently rebounded back up to their IPO price, and earnings aren’t notable, there is material upside if the company manages to figure out how to keep advertising revenues high. Gaining a foothold in emerging markets will be a key differentiating factor in this effort. And getting to customers first only helps the company’s prospects.
Services Increasingly Important
The shift toward services is a notable one taking place in the technology space today. For example, Apple Inc. (NASDAQ:AAPL) has come to a crossroads in its life. While it is best known for its high-tech devices, management and investors appear to have realized that selling an ever-increasing number of gadgets isn’t sustainable.
Investors have reacted by pushing the stock some 40% off of its highs. That’s left it with a PE of around 12 and a dividend yield of approximately 2.8%. Management has reacted by starting to introduce services like iTunes Radio. This is an ad-supported radio service that will be native on Apple’s mobile devices, giving it a built-in user base.
Although Google’s Android has a much larger market share, Apple Inc. (NASDAQ:AAPL) customers tend to be very loyal. That makes its users almost like a network of customers. If it can tap into those customers in more ways, it can build a revenue base that’s annuity like instead of relying on individual product sales. That’s roughly similar to what Facebook is trying to do.
Watch the Shift
Keep an eye on this shift, because the companies that can attract, keep, and monetize customers in their networks will likely be long-term winners. Facebook is pushing this model into emerging markets before others get there. That should be a good long-term investment. Apple and Google, meanwhile, are more established companies trying to figure out a new landscape. Of the two, Google’s shares are pricing in success. That could make Apple a better long-term buy.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Apple, Facebook, and Google. The Motley Fool owns shares of Apple, Facebook, and Google.
The article The Social Giant’s Emerging Market Foothold originally appeared on Fool.com and is written by Reuben Brewer.
Reuben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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