In a move to woo mobile users, Facebook Inc. (FB) recently released its centralized “App Center” that consists of more than 600 applications including Nike+ GPS, Ubisoft Ghost Recon Commander, Stitcher Radio, Draw Something and Pinterest.
The App Center is available on the Internet as well as on Apple’s (AAPL) iOS and Google’s (GOOG) Android-based mobile devices. Mobile revenue growth had been a bit of concern for Facebook lately and its initial public offering (:IPO) also suffered due to the lack of visibility around monetization of mobile platforms.
Although Facebook reported 488 million monthly average users (:MAU) for its mobile products as of March 31, the company expressed doubts in its S1 filing prior to the IPO, regarding the success of its monetization efforts in the mobile segment.
This is primarily due to the fact that historically Facebook has been totally focused on the desktop segment. Hence its applications were cumbersome for mobile users and the small windows of mobile phones.
Mobile is a different ballgame altogether. Unlike personal computers, mobile users navigate much faster over their devices and applications as they are mainly done on the move. Hence, mobile applications need to be smart, simple and fast.
Due to this reason, Facebook never really had any ad coverage on mobile platforms, as Ads along with mobile applications need to be much catchier and less time-consuming than the ads aimed at desktops. In March this year, Facebook included sponsored stories in users’ mobile for the first time in its history.
We believe that the roll-out of the centralized application database will attract more mobile users to Facebook. As the App Center recommends applications based on users’ personal choice and their friends choice, mobile users will find it easy to navigate and search through the database to access their apps within a short span of time.
Moreover, the new App Center connects users with Apple’s and Google’s respective application stores, from which users can simply download apps on their mobiles. The App Center also carries a new “send to mobile” feature; through which desktop users can download mobile apps.
Although we expect that the new App Center will boost Facebook’s mobile customer base, it is likely to lose some non-advertising revenues (transaction fees charged by third party providers) by forwarding users to stores of Apple and Google, Therefore, the effectiveness of the App Center in terms of generating significant advertising revenue from mobile platforms is something to be proved, in our view.
Nevertheless, we believe that Facebook is well positioned to grow over the long term based on its large customer base and proven business model. The company enjoys a first mover advantage in the social networking market. Although advertising revenue has somewhat slowed down in recent months, we note that non-advertising revenues increased five fold in 2011.
This is the revenue Facebook earns from third party developers and through the sale of Facebook Credits (a form of virtual currency). As more and more third party developers flock to Facebook, we believe that non-advertising revenue will increase going forward.
However, increasing competition from established players such as Google as well as new entrants and uncertainty in the mobile segment can limit upside going forward. Currently, Facebook has a Zacks #3 Rank, which implies a Neutral rating over the short term (1-3 months).
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