February 14, 2013
Last May, Facebook's mobile strategy was seen as a major chink in the armor of the social networking giant. Before launching its IPO, the company disclosed in its SEC filing that it was facing challenges in shifting its ad sales to mobile platforms, one of several uncertainties noted by analysts that caused investors to respond negatively. The firm's stock barely rose above its opening price of $38 on the first day of trading, despite Facebook's $16 billion valuation.
Since then, the outlook for Facebook's mobile efforts has changed: After retooling its strategy and revamping its apps for better responsiveness, the company garnered 23 percent of its fourth quarter ad revenue from users on smartphones and tablets: a total of $306 million, up from 14 percent of sales in the third quarter.
14 Things We Learned from Facebook's Earnings Call
Facebook is one of many companies aggressively pursuing a mobile strategy. Social game maker Zynga, for example, is focusing on mobile platforms as one way to reduce its reliance on Facebook for distribution of the company's games. And Google has integrated mobile dashboard management tools into its AdWords program. But it's not just technology companies that need to join the mobile race, say experts at Wharton: All consumer-facing firms will have to consider the smaller screens on smartphones and tablets as a primary channel in the future.
According to the Pew Research Center's Internet & American Life Project, 85 percent of American adults own a cell phone. Among those, 56 percent access the Internet, 43 percent download apps and 29 percent conduct online banking using their phones. "Mobile is becoming more important as people transition to smartphones as a primary device to get information," says Shawndra Hill, an operations and information management professor at Wharton. "I don't think anyone is doing mobile 100 percent [perfectly], but companies need to invest because customers are going mobile."
For consumer-facing companies such as retailers, restaurants and banks, mobile applications are a requirement to compete, says David Hsu, a management professor at Wharton. "If a company is consumer facing, it has to have mobile as a channel."
The challenge for companies is developing a strategy that takes advantage of the unique characteristics of mobile platforms, such as their portability, Internet connectivity and GPS capabilities, and providing a consistent experience across all screens, including the PC. "Everyone knows mobile is increasingly important and that time spent online is continuing to shift [away from PCs], but that doesn't mean the desktop is irrelevant," notes Kendall Whitehouse, technology and media editor at Knowledge@Wharton.
Indeed, popular mobile photo-sharing service Instagram, acquired by Facebook in 2012, just last week announced a new service: Instagram photos viewable on the desktop over the web. In a blog post, co-founder Kevin Systrom noted that while the firm has been focused on "building out a mobile-only experience," in order to make Instagram "even more accessible" the company decided to "expand to the desktop web."
Andrea Matwyshyn, a legal studies and business ethics professor at Wharton, agrees companies need to "create a continuous user experience" between screens. The problem: "There is no blueprint yet. Mobile strategies are often industry driven and company specific."
SCRATCHING THE SURFACE
According to Wharton marketing professor Pinar Yildirim, regardless of industry, all companies need to take certain steps to ensure a sound mobile strategy. The first is to design a user-friendly application. "Some mobile designs can be very [user] unfriendly and jammed," she says. "Firms should understand how consumers use their mobile site and develop [their platform] accordingly."
Google's Earnings: The Search Engine That Could
Along those lines, companies need to decide which operating system, or systems, to design their applications for, and remain aware of the limitations in screen size and processing power on mobile gadgets versus on PCs. When possible, applications should also engage consumers' penchant for search and incorporate location-based results that use a smartphone's GPS signal, Yildirim adds.
Nuts and bolts aside, one of the biggest hurdles for any mobile strategy is defining success, which can vary by company, say experts at Wharton. Services such as Twitter, Facebook and Google will ultimately aim to monetize advertising. A bank would consider customer engagement and retention as a win. Retailers want to drive sales through their apps. And a company such as Starbucks might aim to increase transaction speeds and move lines faster using mobile apps.
Saikat Chaudhuri, a management professor at Wharton, points out that monetization won't immediately apply to many companies beyond Facebook and Google. "We've just scratched the surface of the mobile platform," says Chaudhuri. "The monetization piece is really phase two. It's about engagement right now. And then monetization once mobile usage patterns are apparent." Depending on the industry, better marketing and customer service are possible with mobile, he adds. "The power of mobile is the immediacy to target, interact and communicate."
How You're Shaping the Future Through 'Big Data'
According to Hill, at the moment there are no clear ways to define mobile success beyond monetization. "Ad revenue and revenue in general are obvious [benchmarks]," she says. But there are other outcomes to consider as well. For example, medical applications could be tied to health outcomes and fitness, and banking applications could be measured based on the number of transactions they generate, Hill notes.
FOLLOWING THE MONEY
During Facebook's fourth quarter earnings conference call on January 30, CEO Mark Zuckerberg said that the transition to mobile was critical to the company's success.
"We made this big transition where now there are more people using Facebook on mobile every day than on desktops. This was challenging for us to navigate, since we started off the year with apps that weren't as high quality as we wanted, and no ads in our apps at all, but now we're coming out of the year with a strong foundation and a lot of momentum," said Zuckerberg. "Today, there is no argument that Facebook is a mobile company. There are three main parts of our strategy: Build the best mobile product, build the platform and services that leverage the social graph and build a really strong monetization engine."
Beyond ad revenue, Zuckerberg said that mobile success was also defined by "focusing on basic issues" like app performance. The company rebuilt its Android version of Facebook to make it more stable and faster. Now, Facebook is on a monthly schedule to update its apps. "If we do this well, we should be able to bring even more relevant content and connections to more people, and continue to deepen their engagement," said Zuckerberg.
On the advertising front, Facebook said that it delivered 50 million mobile ads to Walmart's existing and potential customers over Thanksgiving weekend. However, some analysts question Facebook's mobile ad success. Pivotal Research analyst Brian Wieser wrote in a research note that Facebook now sells its desktop and mobile ad units for its news feed in one bundle. "Growth in mobile advertising at Facebook is not indicative of advertisers intentionally flocking to mobile, nor the creation of a massive mobile advertising ecosystem," Wieser noted. "At least not yet."
Google made a similar move recently by bundling mobile and desktop ads. Previously, marketers could purchase mobile-only ads. On February 6, Google introduced "enhanced campaigns" for AdWords, the search giant's text ad platform. "Enhanced campaigns help you reach people with the right ads, based on their context like location, time of day and device type, across all devices without having to set up and manage several separate campaigns," said Google in a blog post.
"We now live in a multi-screen world. People carry a super computer in their pocket all the time. In fact, we feel naked without our smartphone. And many users have more than one device: a laptop, a phone and a tablet. We are living in uncharted territory. It's a new kind of computing environment," said Google CEO Larry Page on the company's fourth quarter earnings conference call on January 22. Nikesh Arora, Google's Chief Business Officer, said on the same conference call that the company was aiming to build "a common experience across multiple screens for advertisers."
While Facebook and Google continue to tweak their mobile business models, largely by eliminating the distinction between ads on the desktop and mobile devices, gaming company Zynga is trying to figure out a way to make money on mobile. During the company's fourth quarter earnings conference call, Zynga CFO Mark Vranesh said the firm is launching a bevy of new games for mobile devices, but "we don't plan for those games to have a meaningful contribution to 2013 revenues."
Zynga missed Wall Street's earnings and sales targets in the second quarter of 2012 and navigated through executive turnover as its game usage dropped on Facebook, in part because users are increasingly using smartphones to access the social networking service. For the second quarter ending June 30, Zynga's revenue was $301.6 million, down from $329.2 million in the first quarter. In the third quarter, the company's revenue was $255.6 million before stabilizing at $261.2 million in the fourth quarter.
However, Zynga has 72 million monthly active mobile players, and executives said during the call that the entire company is now aligned around games developed for the small screen of smartphones. David Ko, chief operating officer of Zynga, noted that the company only had 20 people focused on mobile two years ago. "Today, most of the company is focused on the mobile opportunity. More and more of our players are coming to us from mobile."
If mobile is the future, then do companies that launch on mobile platforms have a significant advantage over those that migrate from the desktop to mobile? According to Hsu, both starting positions in the mobile race have their drawbacks.
Companies like Facebook and Zynga are trying to "retrofit" a desktop experience to mobile applications. Meanwhile, companies such as Instagram and location-based social networking application FourSquare are developing web sites for PCs that would extend or enhance the mobile experience. "There are equivalent challenges to each situation," says Hsu. "The small screen forces a company to have discipline, but then it needs to add value to expand [to the desktop]. A company like Facebook has the opposite challenge: It has to get better at defining the essentials of its experience." In other words, how far can Facebook streamline itself for a mobile app and still be what users have come to recognize as Facebook? "More established companies are struggling to develop a mobile experience for users that maps to what they already expect," Matwyshyn notes.
"If you take advantage of the greater screen real estate and processing power of the desktop, you can't help but compromise on features when you move to mobile," Whitehouse points out. However, "if you are scaling up [from mobile], no one will complain if you add extra enhancements to the desktop version. There's a lot to be said for the advantages of a 'mobile first' strategy."
3 Tech Trends Changing How We Work and Play
Whitehouse points to Twitter as a model for how software may be developed in the future. "From the beginning, Twitter was designed to work on a wide range of platforms, from the desktop to smartphones and even low-end cellphones." He notes that Twitter's 140-character limit was driven by the desire to make the service available through text messaging on basic cellphones. While Twitter later added additional features, such as the ability to post photos from higher-end devices, "this strategy of thinking about the full spectrum of communications platforms from the outset" is the approach that will dominate in the future, he predicts.
It's critical that companies focus on different experiences based on screen size, Wharton experts say. In other words, companies shouldn't merely dumb down a desktop experience to fit on mobile. Each distribution channel has different characteristics. "At the core, you still have to have engagement," says Hsu.
"Companies need to leverage uniquely mobile features such as physical location, immediacy and targeting," adds Chaudhuri. "The true mobility angle hasn't been fully leveraged." Hill agrees. "While it's a little creepy that everyone carries a phone that allows them to be followed everywhere, I'm surprised we're not yet getting more location-based advertising that's actually valuable," she says.
According to Matwyshyn, privacy issues may be preventing a targeting utopia. Today, mobile may be the most valuable platform for location data and personal information. "This data raises the privacy stakes," she says. Security will ultimately become an issue, too, since mobile platforms are likely to be a big target for future cybercrime. Mobile security models are less developed and therefore easier to attack, Matwyshyn adds.
Whatever the potential pitfalls, the sheer size of the mobile market means all companies will have to become smartphone savvy. "Mobile is going to take over in the next couple of years, and companies will have to pay attention to that fact," says Hill. Eventually, "mobile may become the only interface between companies and their customers."
This article originally appeared at Knowledge@Wharton.