Thursday, Mark Zuckerberg announced Facebook's (FB) new mobile strategy. Starting April 12, you will be able to download and install Facebook Home directly from the Google Play store or buy an HTC phone which will have the software pre-installed. While this announcement was delivered with a typical Zuckerberg lack of enthusiasm, it was the best possible announcement they could have made.
Even though Zuckerberg had previously denied making a Facebook phone, the rumors that they would announce either a new phone or a forked version of the Android OS were rampant. Either one would have been a bad idea.
A new phone would have put them in a niche market (Smartphones for avid Social Network Users) with very little justification for most people to buy the phone. A lot of people use Facebook but I'm not convinced they are so obsessed with it that they would buy a phone centered around the site. The new OS approach makes it even more complicated since they have all of the same problems with the added overhead of managing and maintaining yet another version of Android.
So why was Facebook Home the best possible approach?
Simple. Facebook has to really dominate in social mobile apps and provide a seamless experience for users. They need a mobile focus as Zuckerberg acknowledged in their 2012 Q3 earnings conference call. A stronger mobile presence will help them retain or grow their already impressive engagement levels but more importantly, it will help them monetize their user base more effectively. Something they already have identified as key for future growth of the platform. By not building a phone or creating a new OS they don't lose sight of their core strategy.
Types of Facebook Users and Engagement Levels
There have been a number of articles on why Facebook will fail but most of them are completely off base.
One of the biggest points of confusion is centered around their user-base. Facebook followed a growth strategy that was completely backwards from most companies with the possible exception of Twitter. A recent argument presented by another Seeking Alpha contributor was that Facebook was losing users and the numbers supported this. I propose that every user base has users with different levels of quality and engagement.
For the sake of this article, I'm defining the users according to the following categories.
- Hard-core users
- Casual users
- Breezy users
- Commercial users
- Artificial users
Hard-core and casual users are the meat and potatoes of a user base. These are the users who dominate the time and resources for a platform and bring it to life. In other words, they are the users.
Breezy users will login on holidays or a few times of year as the need dictates. This includes the grandparents who created an account just to see the photos from last Christmas, the people who created an account just to see what the fuss was about but didn't ever engage with the site, and the users who created an account just to have one but really are anti-social and wouldn't use it even if it bit them on the nose. Commercial users create the other half of the advertising equation. They are the source of the advertising dollars that is realized when the hard-core and casual users click on ads and "like" pages.
That leaves artificial users. An artificial user is an account or a page that does not reflect an actual entity human or otherwise and is created for the purpose of leveraging some goal such as the prevalent Fiverr artificial "25000+ likes to your fan page" gig. Fiverr is an interesting online site for services that are all priced at $5. One of the popular services is to purchase "likes" for a Facebook page.
In this case, a popular approach is the creation of artificial accounts just for the purpose of "liking" pages. While I don't know of any practical way of measuring the number of these accounts, this would be very interesting information to have for both Facebook and Twitter.
Since we are starting with the assumption that Facebook has already acquired their users, thrashing in the breezy and artificial user categories is not really a problem.
Monetizing Existing Users In Relation To Engagement
If you refer to my previous article on Facebook's Graph Search, I measure average revenue per user (ARPU) with a focus on the revenue per user per minute. The idea is that most sites have a shorter user engagement period by far than Facebook. Google (GOOG) has an average engagement time of a little less than two hours where Amazon (AMZN) typically holds a user's attention for about 30 minutes.
By comparison, Facebook has an average user engagement time of over 6 hours and they make less per user than any other site. When you take into account the fact that their users are on the site more than three times longer than other sites, this is especially embarrassing.
If they can monetize their users at a more effective level, then they have a huge untapped potential revenue stream.
Getting Back to the IPO Price Level
It's not "if" but "when" Facebook returns to its IPO price level.
They grew and arguably saturated their user bases in a number of markets and are growing virally in a large number of markets where a lot of companies have to fight to obtain users. While this is a very enviable position, they haven't monetized their users effectively. They now have to make money from the users without alienating them. A very tough thing to do.
Here is where my opinion comes in. I believe that Facebook has a superior platform and that they have made the right design decisions especially as compared to MySpace. I also believe the decision making is controlled by some very smart people who get what needs to be done to succeed. They clearly understand the market and the direction they need to go to continue to leverage their users more efficiently. Thursday's announcement demonstrates that.
Based on the actions that Facebook has taken, it is my belief that they are two to three earnings calls from reaching their initial IPO price of $38 per share.
Possible Investing Strategies
So here is where the rubber hits the road. This announcement doesn't really come with enough time built in to show significant growth before the next earnings release on April 29th, 2013 but it will be interesting to hear the comments on the conference call and I would expect to see a substantial impact for the Q2 earnings release.
For promising tech companies that have a hard time connecting with investors, I like to wait for a stumble before buying calls or call spreads for risk reduction.
In the case of Facebook, I've also taken an equity position and use covered calls to enhance profits.