According to the KPCB 2012 Internet Trends Report, smartphone adoption is rapidly approaching 1 billion users with total mobile phone subscriptions exceeding 6.1 billion. Cisco projects that the total number of mobile devices will exceed the global population by the end of 2012. Indeed, the smartphone is set to become the fasting spreading technology in human history. Mobile data traffic grew 2.3-fold over 2011, more than doubling for the fourth year in a row. Recent NDP findings state that by 2016 the tablet is set to overtake the notebook as the popular mobile "PC." So what will the implication of the mobile revolution be for online companies such as Facebook (FB), Pandora (P) and Zynga (ZNGA)?
Growth in Mobile Data Usage
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Smartphones are rapidly overtaking laptops and netbooks in data usage
The inconvenient truth for social media companies is that on-line advertising revenues are lower on average for mobile users than desktop users. The aforementioned KPCB report finds that desktop users have an effective CPM (eCPM) of $3.50 versus an eCPM of $0.75 for mobile internet users. eCPM is calculated by dividing total earnings by the total number of impressions in thousands. Basically, desktop advertisements were found to be 5x more effective than mobile advertisements by this standard performance measure. These findings imply that the expected growth in mobile coupled with a decline in desktop usage will result in lower average eCPMs for advertising-dependent firms. This trend is revealed in a decline in average revenue per user (ARPU) for mobile at several online companies.
At Pandora, the ARPU of a desktop user was $6.62 versus an ARPU of $3.87 for mobile users (1.7x desktop/mobile). At Zynga, desktop ARPU came in at $25.00, while mobile ARPU was $5.00 (5x desktop/mobile). Perhaps KPCB's "Desktop ARPU/Mobile ARPU" will become a standard metric we use to value online companies. High multiples will not prove favourable. For Facebook, as the amount of mobile active users grew from 325 million in Q2/11 to 488 million in Q1/12, ARPU across the entire network fell from $4.37 to $4.00. Even at the venerable Google (GOOG), mobile CPC (cost-per-click) was found to be 41% lower than desktop CPC.
Why is growth in mobile consistent with a decline in average revenue per user? Smaller screens are resulting in smaller advertising revenues. It's a matter of taking advantage of the advertising real-estate available. Consider the difference between displaying advertisements on the screen of a 19-inch desktop display or a 15-inch notebook versus the 3.5 inch screen found on the iPhone. As our smartphones become more capable and we become more reliant on essential utility 'apps', we will continue to spend more time on our mobile devices and spend less time looking at traditional web advertisements.
Keith Tare argues that we are witnessing the decline of the page-based, desktop-centric internet. Tare observes that the 'new' internet is more mobile, closed and 'app-centric'. In the mobile world, page-based ads, pop-ups and other desktop-era advertising solutions make little sense. When you are viewing a more condensed amount of information on a smaller display, ads are largely ignored or even reviled as a nuisance.
Jack Krawczyk, a founding member of Google+, states that the unique nature of mobile means users now go online in 'bursts' of usage, rather than the sustained usage we see in other media such as television and desktop-web. He cites that mobile users log on to an application for an average of 71 seconds, and that the last thing application users will want is to be hit with an advertisement that is intrusive and anti-ethical to the user experience.
Traditional web companies are losing consumer attention to mobile. Online firms must find a way to provide relevant advertising solutions for mobile without damaging the user experience. Until then, ARPU will likely continue to decline as mobile usage increases relative to desktop usage. A big question for online-advertising's future will be how 'Web 2.0′ firms reconcile the small-screen problem.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
