Facebook Prints Money

Facebook’s earnings potential is remarkable. As an industry analyst firm, ABI Research tends to focus on the technology and the markets but it is hard to ignore the net result of Facebook’s use of technology and market opportunity. At the end of 2Q-2017, Facebook generated US$9.32 billion in revenue. Up 45% year on year for the quarter. There is an incremental “reduction” in the growth rate of its revenue (59% versus 45% for the previous comparable period) but it does not look like Facebook’s money making machine will hit a ceiling anytime soon. To put this in context, Facebook’s revenue in 2008 was just US$272 million.

And Facebook is profitable. Operating margin for the quarter was 47% compared to 42% one year ago, Facebook’s seasonal cycle of advertising revenue (it builds up to the fourth quarter) could well see operating margin touch 55% (was 52% in 4Q-2016).  Where is Facebook’s revenue coming from? And where will it come from in the future?

Just 5 years ago, for 2012, only 11% of Facebook’s revenue came from mobile-centric advertising. For 2Q-2017, 87% of Facebook’s advertisement revenue was mobile-centric. Advertisement revenue constitutes 98.3% of overall revenue. The remainder coming from e-payments. 5 to 7 years ago, advertisers would not touch mobile, now it is the pre-eminent platform for advertising.

There are, however, a couple of grey clouds hanging over Facebook. 48.6% of its revenue comes from just 11.8% of its customer base. At the end of 2Q-2017, Facebook reported 2 billion monthly active users (MAUs). The USA and Canada represent that 11.8% of its customer base. At present, a North American user generates US19.38 in ARPU compared to US$2.13 for Asia. Europe is better at US$6.28 but Facebook does need to find ways to lift advertising revenues from European, Asian and RoW advertisers.

The other challenge Facebook is facing, is increasing saturation in its Facebook News Feed placements. Facebook has warned analysts it is facing a limit to the amount of advertisements it can place in the News Feed channel. This largely relates to the North American market. 

Facebook’s financial performance will not hit the buffers any time soon. Average disposable income in Asia and the RoW is steadily on the rise and more crucially, the level of smartphone ownership and 4G LTE subscriptions will continue to build in these markets. ABI Research estimates worldwide LTE subscriptions will grow from 2 billion in 2016 to 4.2 billion by 2022. In 2016, 35% of smartphone shipments were 2K or more in resolution. By 2022 it will be 90%, more than adequate for mobile advertising.

In its 26th July 2017 earnings call, Facebook’s senior management declared they plan to launch short form video as well as longer form TV-style videos to provide placement opportunities for advertising. On the 9th August, Facebook announced the launch of its “Watch” video platform. Initially Watch will only be available to a limited group of people in the U.S. Mark Zuckerberg, commented Watch “will be home to a wide range of shows — from reality to comedy to live sports”. Furthermore, Facebook anticipates its picture-centric Instagram platform should help drive revenue growth. It is notable that Facebook’s CapEx investment for 2016 was US$4.49 billion, up 78% on 2015. Mobile telcos will need to beef up their mobile network infrastructure to cope with this increasing video-based traffic and advertising load that will come from Facebook.

Clearly competitors will be attracted to this lucrative advertising pie but it is unclear if there is a contender to really take on Facebook. Tencent with its WeChat, and Sina Weibo, are significant social media players in the Chinese market, and they are spreading their footprint into other Asian markets... Snap recently had an IPO on the NYSE, but those contenders are only snapping at the heels of Facebook.

** Article based on BBC TV interview by Jake Saunders