Facebook proves it can make money on mobile

Social network heartens Wall Street investors who find positive third quarter news after sluggish IPO

Facebook has shown Wall Street that it's finally starting to figure out how to make money from its vast array of mobile users.

It's third quarter financial report, which showed a significant increase in mobile users and mobile revenue, proved heartening to the financial analysts and investors who have long criticized the social networking vendor for lacking a mobile strategy.

"Facebook had to prove that it could profit from mobile," said Ezra Gottheil, an analyst with Technology Business Research. "Now they've proven they can. If it can profit some, it can profit more. Once they've found a way, the upside is almost inevitable."

The third quarter financials released Tuesday showed that mobile ad sales of about $150 million accounted for 14% of Facebook's overall revenue of $1.26 billion. The overall revenue was up by 32% and exceeded analysts expectations.

The company reported a loss of $59 million, which did not deter investors.

Just before Facebook's earnings call after the close of trading on Tuesday, the company's stock was at $19.50 a share, not quite half of the opening IPO price of $38. At 1:20 ET on Thursday, the share price was at $22.74.

The investor reaction was good news for a company that has taken a very public beating since its lackluster initial public offering last May.

The earnings report noted that the number of Facebook monthly active mobile users hit 604 million in the third quarter, up 61% from the year-earlier period.

Facebook also noted in the report that it has closed its purchase of Instagram, a popular photo-sharing app, has redesigned its iOS app and has delivered new development tools for iOS and Android.

"They've yet to really crack the nut and capitalize on the big opportunity inside the mobile space, but this shows they have made some progress," said Brad Shimmin, an analyst with Current Analysis.

"It's up to Mark Zuckerberg to show the board that they are making slow and steady progress. That would be better than shooting in the dark and missing," Shimmin said.

Shimmin said that it will be considered a success if Facebook can continue to gradually increase revenue generated from its growing mobile base,

"If it continues to slowly improve, I think that will be adequate for them," he added. "It would be a much, much worse problem if they make some wild move that fails."

Internet companies, like Google and Facebook, have been struggling to figure out how a rapidly accelerating base of mobile users can be monetized. Companies risk of filling up to much of a small mobile screen with an ad, which could alienate users.

However, ignoring mobile advertising puts Internet companies at significant risk as their users quickly move from browsers to smartphones and tablets to access the Internet.

"Ads are challenging on mobile small screens," said Gottheil. "Mobile traffic is going nowhere but up. If users will tolerate advertising, then the revenue stream is ensured. It looks like Facebook has found a way to get users to tolerate advertising."

It's critical that Facebook continue moving forward, Gottheil added.

"It's more than positive," he said. "It's absolutely necessary. Once it had its loyal user base, Facebook was always going to be successful. The questions were when, how, and how much. It looks like when and how have been answered."

Sharon Gaudin covers the Internet and Web 2.0, emerging technologies, and desktop and laptop chips for Computerworld. Follow Sharon on Twitter at @sgaudin, or subscribe to Sharon's RSS feed . Her e-mail address is sgaudin@computerworld.com.

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