Analysts claiming the demise of desktop are wrong
There has been a lot of fuss lately about Facebook’s mobile performance relative to its desktop performance. In fact, Morgan Stanley even went so far as to cut FB’s forecasts on the even of the IPO based on the fact that “Mobile advertising to date has been less lucrative than advertising on desktops”. I think that’s just ludicrous. And mostly because none of these analysts are skating where the puck is going… As with most things, I think the source of Facebook’s strength comes from a source not yet fully captured by anything I have read so far.
Analysts have been assuming that as global internet service consumption shifts to mobile devices, that any drop in mobile ad eCPMs (effective revenue per 1000 views) would lead to a reduction in overall revenue, as mobile cannibalizes desktop views and average revenue per view declines. Seems to make sense, right? Except that this view somehow magically tries to hold all the other variables in the equation constant. Ceteris Paribus. Just like the analysts’ economist lecturers taught them…
Backing up a second, I think it’s important to realize what mobile really means for a web service, since there is an enormous amount of hype about it, and for my money it’s mostly misguided. People go as far as suggesting ridiculous things like “in the next few years, people will not need laptops, as they switch to mobile”. Or “Mobile is the future, and you don’t want to be left out”. This demonstrates a fundamental lack of understanding of user behavior – that device form factors are finally cheap and specialized enough to match consumption patterns. In other words, the days of having to do everything on your single device, purely because it *could* do everything, and because it was too expensive to split these use cases, is over.
Understanding user intent
I tried (for a few minutes anyway) to break the world into fundamental areas as I believe a user would experience them, with the hope of understanding what it is exactly that mobile is going to “disrupt” (I’m sure there are other dimensions here, I just like this simple view):
Looking at this analysis, it is hard to argue (except for a few exceptional cases) that the Convenience row (Mobile) has littler overlap or real cannibalization potential over the Experience row (at least not with existing technology). What is noticeable instead, is the new middle ground between the two, which more reasonably explains the attractiveness of the iPad and tablet form factor (beyond the Apple pixie dust effect). Posts like this one, claiming that “The pc is dead. Long live mobile” are just plain wrong. Down-right link-baity. Facebook didn’t buy Instagram because they “failed at Mobile”. If that were so, FB’s mobile view growth rate wouldn’t be eclipsing their desktop growth rate.
So why is mobile not the new answer to everything?
Putting myself in the shoes of an advertiser, it’s not immediately clear that any of the convenience use cases are particularly attractive as content appropriate to serve high value ads alongside (sensor + location = offers aside). The other thing that jumps at me from this framework, is that the role of tablets and internet TVs (as two alternative form factors in hype at the moment) are actually becoming increasingly specialized at capturing subsections of this graph much better than existing desktop and mobile formats – for example, text books and long form video respectively. The final thing that jumps out at me, is that there will be no form factor to rule them all. Each form factor will instead evolve to meet the needs of a particular set of use cases, and the suite / cross-device strategy, rather than single minded focus, is what will win the hearts and minds of users in the new digital age.
My personal belief, is that the role of the mobile device will shift entirely from being a desktop replacement to our eyes, ears and general sensory organs in a digitally recorded world. That’s obvious, you say. Everyone is using Run Keeper. And Fit Bit. And wireless scales. Sure, the first bit of that is obvious. You can hardly throw a stone and not hit someone measuring something inane about themselves. The magic though, happens when a service can connect that new digital sensory organ to your perception of the rest of your world, and fundamentally change your experience of the other digital services in your life (consumed on your other complimentary devices) because of how well it understands you. That is what I think is missing from this discussion.
So what does that mean for Facebook?
It means they are cheap at the price (currently $32 per share). Analysts assume the business will grow as is – as an on-site and mediocre display ads machine targeting user’s data-harvested interests. This misses so many points about Facebook’s core monetizable asset (covered in my next post). It’s not eyeballs. That was the mistake Yahoo and AOL made. Facebook has become the de facto arbiter of identity. And the more they can improve the relationship between their understanding of your identity, and the perceived value of any service, be it their own or another partner’s, the more valuable they are as a company.
Coming back to the analysts’ enterprise value equation from the first paragraph: perhaps the overall pageview mix will shift towards mobile as a proportion, but each each mobile pageview (and better yet byte of content recorded) will increase the eCPMs of ad formats consumed on all other complimentary devices, through improved relevance and targeting. And better still, general paid content across all form factors will achieve higher conversion rates and better pricing as a result.
Mobile is the key to Facebook’s future NOT because everyone will soon transition their entire social experience to mobile or because they will figure out and show you more profitable mobile ads. I predict that nobody will be able to “fix” the per-unit monetization gap between desktop and mobile, largely because mobile adds include other components that make coverage (the ability of a network to find an advertiser willing to show you a relevant ad) decreased exponentially when adding variables like fine-grained location, and type of device.
Mobile IS the key to Facebook’s future because owning your digital sensory organ is key to understanding your identity. And your identity is the asset that Facebook are banking on being able to monetize in the future. That is why Facebook bought Instagram for $1 billion – not to quash the alternative social network threat per se, but to kill the threat of another app supplanting its role as the digital sensory organ of choice.
My next post will deal with “Moving Social beyond the Stream”, and “How Facebook will make more money that anyone expects”
(image credit to Northwest Harley Blog)