Facebook’s Mobile Magic Is Working But For How Long?

Facebook released its Q2 2014 results yesterday and the results were truly impressive. Facebook has been riding high lately after shifting focus on its mobile strategy with series of acquisitions growing mindshare as well as helped with burgeoning smartphone user growth.

Following are some of the key highlights of Facebook’s Q2 2014 performance and upcoming opportunities and challenges:

  • Facebook revenues grew a whooping 61% annually to reach a record US$2.9 Billion, highest ever
  • Out of the total, Facebook’s advertising revenues likewise rose 67% annually to reach US$2.7 Billion in Q2 2014
  • Mobile advertising revenues now represent an impressive 62% of the total ad revenues i.e. US$1.7Billion up from 41% a year ago
  • This is clearly evident as Facebook’s Mobile MAUs* have crossed a billion mark for the first time averaging 1.07B users, up 31% YoY
  • Mobile MAUs are now 81% of the total 1.32 Billion MAUs whereas “Mobile-Only” MAUs reached 400 million users i.e. 30% of the total MAUs
  • Mobile DAUs* reached 654 million users in the month of June, up 39% yoY
  • Facebook’s Operating Margins (GAAP) rose to an all-time high of 48%, recording an operating income of US$1.39 Billion
  • For comparison Google’ operating margin is hovering around 27%
  • Interestingly, Google’s spend on R&D is 14% of the total revenues compared to Facebook’s 16% of the total revenues. Though Google outspends Facebook  by 4:1 on the total R&D budget
  • Facebook is doing well and its mobile user growth is nicely mimicking the global smartphone user growth in spite of censorship in China as shown in chart below based on our smartphone user base metrics:

Facebook MAUs Growth vs. Smartphone User Base

  • Facebook’s mobile MAUs though consist of smaller tablets and feature phones but majority of the growth is coming from smartphone users as the chart depicts
  • From scale perspective these MAUs and DAUs numbers are impressive but the actual time spent on the platform will be very important to understand whether these billions of users are spending more time in a day or month on web properties other than Facebook’s on time share scale
  • Though this scale shows deeper entrenchment of Facebook as an app or platform onto other platforms.
  • Not sure if Facebook is paying advertising cuts to these platform players and even if it does it is still generating good chunk of revenues and attracting tons of marketers
  • However, Facebook has a growing challenge from the competing platforms and messaging apps even though it has acquired Whatsapp, one of the biggest messaging platform
  • Problem with Whatsapp is while users are estimated to spend good time on the platform but the engagement from revenue generation perspective (ads, m-commerce, services) is still non-existent compared to competing platforms such as WeChat, Kakao Talk and others
  • Facebook is struggling where WeChat, KakaoTalk, Line is winning and important pointer of rising competition however, Facebook is growing well in other regions such as Americas, Europe and Rest of Asia
  • As we highlighted a few months ago, Facebook needs to invest in sticky services (music, video or e/m-commerce) across its properties (better if unified) to beef up its platform and increase engagement to compete with these newer players
  • Facebook CEO Mark Zuckerberg  acknowledged this on the call yesterday and hinted on Facebook’s intention to add e-commerce flavor to some of its properties
  • However, we warn that adding a payment platform is a humongous task i.e. to build a robust, intuitive and scalable platform for buyers as well as sellers to engage. WeChat is a very good example in mobile and Amazon in non-mobile front which Facebook will definitely inspire from
  • Again, Facebook will have to take care of the fragmentation issue with so many properties such as Instagram, Whatsapp, Facebook Messnger, which all needs to be aligned to a solution or service to become an unanimous offering and generate meaningful engagement and scale