Facebook: No Longer A Novelty, Revenue Growth Limited

| About: Facebook (FB)

Edited by Adam Isaac

Facebook (NASDAQ:FB) has seen some resurgence lately, and the stock has come back above the $20 mark after going down below $19 in the previous week. However, the stock is still trading more than 40% below its IPO price in May. The major reason for the fall in the price is the lack of investor confidence in the ability of FB to continue significant revenue growth. As I mentioned in my previous article, FB faces an uphill task to achieve previous levels of revenue growth. There are a lot of reasons for the slowing revenue growth including slowing new user growth, competition and market saturation.

In order to increase revenue growth, Facebook needs to come up with new ideas to monetize its mammoth number of users. Until now, Facebook has been unsuccessful in completely monetizing its user base, which expands to almost a billion users worldwide. In this article, I take a look at some new strategies that can increase Facebook revenues and the challenges faced by the company.

Facebook search: Is search engine the way forward?

During a recent tech conference, Mark Zuckerberg hinted that the firm may be launching its own search engine. He said, "without even trying," Facebook users perform about a billion queries per day. Most of these involve an attempt to find someone on the social network, but a "meaningful portion" are efforts to find apps and information about brands, he said. "I think that there's a big opportunity there at some point, and we just need to go do that." Facebook has a wealth of information which it is currently not using. On the other hand, Google (NASDAQ:GOOG), the biggest competitor for FB in its ads business, has tailored its searches according to the preference of users and increased its revenues significantly. According to the most recent earnings announcement, Google has been triumphant in increasing the number of clicks by 42%.

Facebook has the biggest collection of information about its users all over the world; the company collects private conversations, records of road trips, family photos, marriages, births and deaths. These events all flow into the company's servers and lodge there. Facebook has gathered the most extensive data set ever amassed on human social behavior. This data now needs to be used to offer customer specific solutions to the companies. This offer will provide companies with the data on customers, which should enable FB to come up with more effective advertisements. However, FB faces a threat from the U.S. Federal Trade Commission about the privacy infringements. Moreover, the Obama administration recently presented a bill about privacy rights, which could also be a hurdle. At the moment, I believe this can be the most logical way of increasing revenue. I think the users will not be thrilled with increased ads on the small screens of their mobile phones; although there are growth prospects in the mobile ads business. More than 50% of FB users are currently logging in from their mobile devices every day.

Chinese market cannot be left untapped

China is the biggest internet market in the world, and Facebook cannot keep on ignoring it. At the moment, China has more than 500 million active internet users, who can be a fine addition to the slowing number of active users for FB. However, expanding into the Chinese market will not be an easy task for the firm. It faces a number of challenges if it decides to enter the market. The so called great firewall of China does not allow access to Facebook from within the country. As a result, the local players in the market have enjoyed a free run and captured major portions of the market share. Renren Inc. (NYSE:RENN), also called the "Facebook of China" currently has more than 150 million users. While Sina Weibo, a Chinese version of Twitter by Sina Corporation (NASDAQ:SINA), currently has more than 300 million active users.

Another hurdle for FB will be the tough censorship required by Chinese authorities; after the revolutions caused by social media in Africa and Middle East, the Chinese authorities are not likely to relax these censorship requirements. As a result, FB will have to tailor a specific version to enter the Chinese market which is in line with the Chinese censorship laws. However, I believe the company should not just ignore such a huge market because of censorship issues. I believe if the firm enters the market, it will be able to wrestle a big chunk of market share from the local players and the revenues can go up significantly.

Google enters into Facebook's territory

Google's attempt on social networking has not worked as well as the company had hoped. Facebook added Instagram to its portfolio in an attempt to further strengthen its grip on the social networking sphere. On the other hand, Google has replied with the acquisition of Snapseed developer Nik Software. Snapseed is a photo-editing app which had 9 million users in its first year, an achievement that is extremely impressive given its $4.99 price tag. While confirming the news of the acquisition, senior vice president of engineering Vic Gundotra said:

This week we also hit an important milestone-over 400,000,000 people have upgraded to Google+. It was only a year ago that we opened public sign-up, and we couldn't have imagined that so many people would join in just 12 months.

However, Active members remain just above 150 million for Google+. While Facebook has to struggle with monetizing the free-to-download Instagram, Google seems to have acquired something, for which people are already willing to pay. Facebook also needs to come up with apps which can be sold to the users to generate a healthy stream of revenue. At the moment, most of the paid content at Facebook comes from the games offered by Zynga, Inc. (NASDAQ:ZNGA).


Facebook is still the biggest social networking site, and it can further improve its position in the market. However, the main question for FB still remains: will the firm be able to increase its declining revenue growth? I believe the answer to that question will be a "No" unless the firm comes up with something new. The technology industry is always changing and offers immense competition along with juicy opportunities. At the moment, Facebook is not a novelty. The idea has already been copied by competitors and there is more than one outlet for users to switch. I have good reasons for my skepticism about the ability of the company to bombard its users with advertisements. I strongly believe the firm will lose users if the ad bombardment is too heavy. In my view, the firm will need to enter new markets and come up with new ideas to generate revenues, and it will have to lessen its reliance on ad revenue.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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