Facebook IPO's elephant in the room -- mobile

Facebook admits in SEC filing that making money off mobile is a problem

While Facebook executives talk to the country's top investors about its 900 million users and its powerful global reach, analysts say they need to explain how they're going to fix one glaring problem -- mobile.

Facebook executives are in the midst of a roadshow pitching the company's initial public offering to potential investors around the country. The company, the world's largest social network, is eclipsing its competitors and whipping up a flurry of pre-IPO interest in its stock.

However, industry analysts and investors are asking questions about how Facebook will generate revenue from the growing number of members who are accessing the network via their mobile phones from restaurants, park benches and commuter trains.

"Facebook is really struggling with mobile," said Zeus Kerravala, an analyst with ZK Research. "They make almost no money on it. I think mobile makes people use Facebook more, but Facebook hasn't figured out how to monetize that."

Earlier this week, comScore reported that Facebook users are spending more time accessing the social network from their mobile devices" than they do from browsers.

Also this week, Facebook admitted in an amended filing with the U.S. Securities and Exchange Commission that this shift from traditional desktop or laptop computers to mobile devices was hurting the company's advertising plan. In the filing, the company also stated it has no way to monetize this growing mobile trend.

Facebook noted in the amendment that its "daily active users [are] increasing more rapidly than the increase in the number of ads delivered." Mobility was also listed among the company's "risk factors."

On Wednesday, in an attempt to address the burgeoning mobile issue, Facebook announced that it would launch an App Center designed to let users look for "high-quality" mobile apps that integrate with the network.

"Well, no one, not Google, Yahoo, LinkedIn, etc., makes money off mobile," Kerravala said. "It seems mobile has become a facilitator to greater usage, but the business model on how to charge for it is unclear ... But I do think mobile makes people use Facebook more, which is ultimately good for Facebook."

However, Patrick Moorhead, an analyst with Moor Insights & Strategy, said Facebook isn't struggling to figure out mobile any more than any other Internet company is. The issue for Facebook is that it has such a growing mobile base and that with an IPO approaching, all eyes are on the social network and how it will resolve this issue.

"Very few social media companies have been able to monetize mobile, particularly those companies wedded to display advertising, like Facebook," Moorhead said. "To achieve their optimal company value, Facebook will need to figure this out."

He added that the new App Center will help, but that it's only one step in the right direction.

"The App Center is a small part of Facebook's mobile dilemma, but on a bigger-picture level, they need to figure out check-ins, deals, and repeat customer programs," Moorhead said. "Ironically, companies like Groupon and FourSquare have many of these technologies and programs that Facebook would need to be successful."

One mobile issue that all analysts generally agree needs to be addressed soon is Facebook's own mobile app. The Facebook app is basic and provides users with few features. On top of that, it's slow.

"Users who have been fleeing to Instagram and Path are doing this not just because of the new social features, but because of their speed, too," Moorhead said. "In addition to being slow, the Facebook app isn't even monetized yet and, all things being equal, would be even slower after monetization. Nothing ever gets quicker with display ads, links or deals."

Questions remain over whether the mobile issue will affect Facebook's upcoming IPO. Most professional investors have already calculated this risk factor into the valuation. The mobile issue shouldn't be a huge shock to them, though the extent of work that remains to be done to monetize mobile may be worrisome.

"I don't think this will greatly impact Facebook's IPO at this time," said Brad Shimmin, an analyst with CurrentAnalysis. "However, the company must move quickly and decisively or risk being left behind in a customer base that is quickly becoming accustomed to Facebook without advertising."

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

See more by Sharon Gaudin on Computerworld.com.

Copyright © 2012 IDG Communications, Inc.

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