FaceBook Q2 – Efficiency Engine.

Great numbers but the bigger picture is missing.

• FaceBook reported strong Q2 results as monetisation of mobile traffic improved much better than anyone expected.
• Q2 Revenues / EPS were $1.81bn / $0.19 compared to consensus at $1.62bn / $0.14.
• Mobile was the star of the day making up 41% of total revenues up from 30% in Q1.
• Of the 1.15bn users, 819m are essentially mobile users and 61% of all users are on the site every day.
• The best news of all was that usage is not declining even as user numbers continue to rise.
• Typically, the latest additions are the more casual users who use a service least and hence generate the least revenues.
• FaceBook is managing to buck the trend with its strong networking effect and per user statistics are not declining even as user numbers grow.
• This is positive as it means that the total addressable market for FaceBook is expanding in line with its user base.
• FaceBook is making good use of all the levers that are available to it and advertising in the newsfeed has become a major revenue driver.
• 1 out of every 20 items is an advertisement and there has been no drop in satisfaction meaning that the advertising relevant to the users and they are tolerant to it.
• How far FaceBook can push this is uncertain but I suspect that this could probably go to 1 advertisement in every 10 items before users start getting annoyed.
• The problem is that when FaceBook has maximised the monetisation of social networking growth will suddenly grind to halt.
• The better things are now, the more quickly this will happen.
• This is why I think that the company is missing out on the bigger picture.
• FaceBook has nearly 4x the number of users that Google does in the mobile space and yet Google is projected to have a 56% share of mobile advertising this year with FaceBook on just 13%.
• I believe that this is because FaceBook is still a one trick pony offering very little outside of its core social networking service.
• Social networking makes up just 26% of smartphone usage leaving the other 74% of user activity unaddressed.
• Google has a service for 66% of a user’s activity on a smartphone which I believe is a major reason why Google is making so much more money in mobile than FaceBook is.
• In order to catch up, FaceBook must break out of its niche and address the other activities that users do with smartphones.
• Video on Instagram, FaceBook Home and so on are all attempts to do this but so far very little has stuck.
• This is the key to longer term growth because without it the current run will soon run out of puff.