The earnings announcement could be a huge event for FB shareholders. The company must prove that it is making progress in its efforts to monetize the business. This means that FB must effectively communicate a believable strategy to increase profits from its 900 million users, something that did not do when the company first offered its shares.
Unlike most businesses, FB users pay nothing to the company to be able to endlessly communicate with “friends.” It does, however, accumulate an immense amount of data relating to its users, including their preferences and habits, which could be worth billions to potential advertisers. The question is, can FB effectively gather data and create unique ways for advertisers to reach its users who will then be persuaded to buy products and services?
Currently, FB earns about $4 billion of revenues annually from advertising, its primary revenue source (85%). This compares to $40 billion of advertisement revenues for Google. The concern at the time of the IPO, and now, is whether FB’s business is conducive to earning revenues at a rapidly increasing rate, to justify FB’s enormous valuation.
FB hired Gokul Rajaram from Google to take charge of the advertising products division. Rajaram is a high-end computer science expert, who has had a successful career with his former employer. His theory is that “[a potential purchaser] would rather hear a message from [a] friend than hear a message from a brand.” In other words, an endorsement of a product from friends carries much more weight than an impersonal banner advertisement.
Reaching mobile users is another critical priority for FB. We learned at the IPO that a huge number of users connect to FB using mobiles. Actually, 50% of FB users fall into this category. The company must determine how to profit from this group. Traditionally, advertisements have not been posted on mobiles, but the company has recently allowed advertisement on some of its mobile platforms.
Another issue facing FB is that most of its revenues are generated in the U.S., and the growth of unique visits in the country has been stagnant . FB’s response will be to try to keep users on line for longer periods of time with interesting content.
Finally, FB must conduct its data accumulation and create applications without alienating users or violating privacy laws, a daunting task. This should be a growing issue as FB shares more information with advertisers in the future.
Three months is a very short period of time in the life of a corporation. But for FB, this three month reporting period could have a long-lasting effect. The company did little to allay concerns about advertisement and growth at the IPO. It must now give investors confidence, or the stock price will suffer.