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By Thomas Clayton

Screen shot 2012-07-01 at 4.05.19 AM

It goes without saying that Facebook (NASDAQ:FB) is the darling of this era’s technology boom. However, as many have repeated over the last month since its IPO, the company is now turning to face some major obstacles. Namely, adoption of the service is slowing, and the company is making little revenue off its increasingly large base of mobile users. I’m going to explain how Facebook can both supercharge user adoption – potentially hitting three billion users by 2014 – and who they can work with to boost their mobile revenues drastically.

In fact, the strategy may seem counter-intuitive in its simplicity: Facebook must prepare to go old school and partner with wireless carriers in its fastest growing emerging markets.

Find Tomorrow’s Smartphone Users

Today, there are five billion mobile connections across the globe. According to Cisco (NASDAQ:CSCO), by 2016, this number will double to 10 billion connections across eight billion mobile devices. Facebook has the opportunity to be installed on every single one, but the company must start now in order to get in front of this coming wave of smartphone adoption.

Who are the smartphone users of tomorrow? The feature phone users of today.

Facebook’s long-term vision and successfully monetizing mobile depends on penetrating this market. The company knows this: they’ve improved the biggest draws of Facebook on mobile, the News Feed, released the standalone Facebook Camera app, and are rolling out a mobile-only ad platform.

On the feature phone side, they acquired Snaptu in March 2011 – an app platform that allowed users to access services like Facebook and Twitter from web-enabled feature phones. They rolled the technology out as Facebook for Every Phone in June 2011, and partnered with hundreds of operators around the world to entice users by making the associated data free for 90 days. In the year since, the app page has registered a whopping 90 million likes.

With today’s social juggernauts building their mobile services exclusively on smartphone platforms like iOS, Android, and Windows Phone, they are leaving out an enormous potential user base: 90 percent of mobile users in the developing world do not have smartphones.

For example, mammoth developing economies in Asia such as China, India, and Indonesia all have a smartphone penetration rate of less than 10 percent, compared to 50+ percent in the U.S. and most developed countries. Moreover, 90 percent of those feature phones do not even have data connectivity. Thus, even companies that build apps enabled for feature phones, are still missing out on the masses in extremely large developing markets.

Catering to feature phone users in the developing world in the short-term allows companies to ensure a vast upside in five years, as users accelerate their migration towards lower-cost smartphones. Services and social networks like Facebook are currently only addressing the tip of the iceberg of this unrealized upside. They should look to entrench their services even deeper into the developing world in order to fuel mass growth and user adoption.

After all, while average ARPU of these feature phone users in developing markets is significantly lower than smartphone users in developed markets and the mobile ad revenue markets are still in their infancy, the consumers willing to pay for subscription service and access to social media services is phenomenally higher than in developed markets since paying for these types of services via a prepaid card is the norm and far more frictionless.

Friending Emerging Market Operators

Many of Facebook’s services can be adapted to feature phones via very basic telephony services – SMS and voice networks for retrieval of updates and USSD for authentication and login. Thus, a user wouldn’t even need a data connection, much less a smartphone or app. Of course, this is not an easy endeavor and requires deploying servers in an operator’s network, but looking at the new users it would bring to the service, it is an extremely small price to pay. This would allow the billions of users on feature phones with no data connectivity in feature phones to access the service – and their willingness to pay a monthly subscription for this is extremely high. Moreover, it acts as bridge to higher tech mobile devices as consumers upgrade over the next five years.

Working with mobile operators can be challenging, but ultimately phenomenally rewarding. For example, my company Bubble Motion was able to attract 17 million users in less than two years and monetize them quite significantly, with no marketing spend whatsoever, by working directly with wireless carriers in a handful of target countries across Asia. Our potential user footprint is a whopping 2+ billion feature phones, which is far beyond what we could’ve hoped for on a smartphone app. We recently launched a smartphone app version of
our service, Bubbly, but for the foreseeable future, our feature phone users will be the overwhelming majority of our revenue stream. Like I said, while ARPU of smartphone users may be higher, the willingness of social media-starved feature phone users to pay for services is significantly higher.

By cracking a few deals with mobile operators in target high-growth countries, Facebook could see their user numbers shoot upwards once again. Facebook has some experience in this already – they’ve already partnered with AT&T (NYSE:T), Verizon (NYSE:VZ) and T-Mobile in the U.S. and with Bango in the U.K, mostly to streamline payment
through Facebook credits charged directly to user mobile bills.

They’ve also partnered with emerging market carriers to peddle their feature phone app – but only on superficial levels like subsidizing data costs for users for 90 days. Compared to the App Store model, leveraging operator networks makes it much easier to reach the masses. On the other hand, working with operators is not easy, which is why so many Valley companies have shunned the idea. However, those with the scale and reach of Facebook or Twitter, need to embrace operators to take their user growth and service to the next level.

Facebook Can Start Making Money in Mobile

It won’t be a lot at first, but by working with mobile carriers, Facebook can extract a healthy revenue share from operators. For example, our current average revenue per user (ARPU) is around $4 in Japan – this is the same amount Facebook makes off of its web-based U.S. users, where it has established a strong ad revenue model.

By contrast, we’re making it solely off usage and access via mobile, which users are completely okay with when accessing services via their mobile device.

Feature phone users can spend money much more easily than their smartphone counterparts (especially those on Android), due to the fact that they are tied into a network’s billing service. In Asia and most developing markets, a very small percentage of smartphone users have entered their credit card information into Google Play for app purchases – in fact, most do not even have credit cards! Direct billing makes up for the greater engagement and web-access that comes with using a smartphone app. In fact, as I write this article, Facebook is announcing frictionless payments in collaboration with mobile operators. However, this still does not
address the feature phone users without a data plan, which is the overwhelming majority of mobile users globally. This is where integrating tightly with operators, especially in emerging markets, will pay huge dividends.

As feature phone users become increasingly engaged with the service and then upgrade to smartphones, this trickle will turn into a torrent. They’ll be much more likely to open their wallets after having done so in the past – you have to attach the hose before turning on the water.

Although partnering with mobile operators is something Facebook has been working on over the past year, expect to see them double down on these efforts in the years to come. To date, it has been primarily focused on getting them to make data charges free for accessing Facebook via their mobile device. Once again, this is great, but does not address those that do not even have data plans – which are the true masses.

All of these lessons come from experience. Our service started out as an operator- embedded service via voice calls and SMS, similar to Twitter in the early days, and has only recently launched a smartphone app version. This has enabled us to both attract a massive audience – one which is now following the evolutionary path as they migrate towards smartphones and a higher-touch experience, all while sticking with our service. In that way, we find ourselves well positioned for the coming Asian smartphone boom.

Although Facebook has made some good strides in this direction, it should double down and embrace the emerging market trend in order to find the serious money in mobile.

Note: Thomas Clayton is the Chief Executive Officer of voice blogging startup Bubble Motion. Prior to Bubble Motion, Clayton was GM of the Worldwide Telecom Business at BEA Systems, an infrastructure software company acquired by Oracle for $8.5B USD. Clayton holds a MBA from Harvard Business School and a BS degree from UC Berkeley.

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Source: Facebook's Mobile Future Rests On Today's Feature Phone Users