It seems that other than Facebook’s poor IPO performance, the only thing anyone can talk about with regards to the company is how they should adapt their mobile strategy. Whether suggesting they buy additional app development companies like Instagram, or releasing their own phone, everyone seems to believe that Facebook’s secret of success will lie in driving more traffic to the mobile channel. Everyone seems to be missing the point.
Although the performance of Facebook’s apps is embarrassingly slow, that hasn’t stopped consumers from adopting the channel in droves. In fact, according to Nielsen, Facebook’s mobile app gets the most monthly engagement of any app on iOS or Android. The problem isn’t mobile adoption, but rather how Facebook can monetize this traffic. No matter how many mobile app companies Facebook acquires, or how well they optimize their existing apps, traffic without a monetization mechanism is very costly to Facebook and their ability to achieve their revenue targets.
Facebook understands this, and knows that their true value lies in the size of their interconnected user base. Metcalf’s Law dictates that the value of a network is proportional to the square of the number of interconnected users. Hence, it is because users have already invested their time in “friending” all of their contacts that Facebook is of value to them, and it’s the magnitude of the effort to recreate this network of friends that prevents users from switching to the next new social trend – I consider this the real reason for the Instragram acquisition their growing network became a compelling reason for users to switch. Regardless, whether a user is accessing Facebook via the online or mobile channel, or whether they’re tapping into this network through a third party app (via Facebook’s API), the value to the end user is consistent.
The problem for Facebook is how to translate that value to users into revenue, specifically with regards to mobile. As it stands today, the ones making money off of mobile are the app companies (mostly games) which leverage the value of that network to increase user engagement. For example, when I was first introduced to Words with Friends by my brother, I installed the app and would spend no more than 5-10 minutes a day playing against him. However, once I connected the app to my Facebook account, I suddenly discovered that many of my other friends and family were already playing Words with Friends, and as I started playing against each of them, my time in the application increased exponentially. Fortunately for Zynga, my increased time in the application directly translated to additional advertising revenue for them. Unfortunately for Facebook, Zynga utilizes Facebook’s open APIs for accessing my friends list, and as such, Facebook made no incremental revenue off of this increase in game play.
If Facebook is going to make money on mobile, and clearly this is something they have to do, they shouldn’t be focused on how to build a better mouse trap, but rather on how to fairly capture their share of the revenue they are already driving. Perhaps they can segment API traffic such that casual use of the Facebook network information remains free, but high volume (read: highly profitable) API traffic is subject to either a pay per use, or revenue share type model. Figuring this out will be the true test of Facebook’s mobile strategy.
