The social network sees big opportunity in getting its service on millions of mobile devices, but it also sees big risks.
For the social networking giant Facebook, mobile phones represent both an opportunity and significant risk to the company's business.
Over the past year, Facebook executives have noted the growing importance of mobile for the company's growth. About a year ago, the company launched an initiative to get its mobile app on all mobile devices, including smartphones, feature phones, and even the Apple iPad. And Facebook usage on mobile devices has skyrocketed.
But in documents filed with the Securities and Exchange Commission on Wednesday for the company's upcoming initial public offering, Facebook admits that the shift toward mobile is also significant risk to its bottom line.
There's no doubt that mobile is Facebook's future. In December 2011, Facebook said that more than 425 million monthly active users accessed Facebook on a mobile device. This is roughly half of all of Facebook's monthly active users. And the company expects this figure to grow, eventually eclipsing the number of users who access the company's site solely via a computer. But Facebook is worried that this trend could harm its business, unless it can figure out how to monetize this growing user base.
"Although the substantial majority of our mobile users also access and engage with Facebook on personal computers where we display advertising, our users could decide to increasingly access our products primarily through mobile devices. We do not currently directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven."
For Facebook finding a way to make money from all these users accessing its site from mobile phones and tablets is one of its top priorities. And as of yet, the company has not disclosed how it will do it.
There has been talk that the company will try to include advertising in the Facebook mobile app in a similar way to how it displays ads on its Web site. For example, its Facebook Sponsored Stories ads, which show how friends are interacting with brands, could appear in the Facebook news feed on mobile devices, too.
So far Facebook has kept mum about how it will develop the mobile app market. But the company already faces stiff competition here, as companies, such as Google and Apple, already have a significant leg-up in mobile advertising. But Facebook may have an untapped advantage over the competition, given that its users share so much valuable information with Facebook.
People on Facebook readily reveal their likes and dislikes, activities, where they live, sexual orientation, where they work, and where they've gone to school. Advertisers are hungry for this information, which they can use to tailor more targeted and meaningful advertisements to individuals.
If Facebook can leverage this opportunity, it could be a boon for the company. But the risks are high. Mobile devices are more personal and advertising via this medium needs to be done thoughtfully.
There are other risks as well that Facebook points out in its filing associated with the move to mobile. For one, the company doesn't own the software or hardware platforms on which its service operates. It also doesn't control wireless carriers, which can block or water down certain apps, such as Facebook, on phones that operate on their networks.
"Facebook user growth and engagement on mobile devices depend upon effective operation with mobile operating systems, networks, and standards that we do not control," the company states.
The company specifically calls out Google and its popular Android operating system as a major threat.
"We are dependent on the interoperability of Facebook with popular mobile operating systems that we do not control, such as Android and iOS, and any changes in such systems that degrade our products' functionality or give preferential treatment to competitive products could adversely affect Facebook usage on mobile devices," the company says in the filing.
Indeed, Google's Android is the fastest growing mobile OS in the world. And it's already the No. 2 operating system in terms of installed smartphone users, as of the fourth quarter 2011, according to ComScore. Android devices made up nearly 30 percent of all smartphones in the U.S. market at the end of the fourth quarter.
The big risk for Facebook is that Google starts including its Google+ social networking service into Android devices. Google has already done this with Gmail, Google Maps and Navigation, Google Search and several other Google products that are tightly woven into the Android OS. And it could easily bake Google+ into every new Android device, leaving consumers with less of a reason to launch their mobile Facebook apps.
"If you think Google won't integrate Google+ into Android, you're kidding yourself," said Scott Kveton, CEO of Urban Airship, which offers a platform on which developers can create mobile apps. "Of course, they will. And that's a big deal, because if all you have to do is sign into Gmail and you're connected to your social network, then why open the Facebook app?"
It's not just Google that will exert pressure on Facebook in the mobile market, but other social-networking companies targeting mobile could also threaten Facebook. The company also notes Twitter and Microsoft as competitors in its S1 filing. And it calls out a slew of unnamed "mobile companies and smaller Internet companies that offer products and services that may compete with specific Facebook features." These may include mobile-specific social networking apps, such as FourSquare, Path, and Instagram.
Indeed, some of these competitors are offering subscribers a better user experience on mobile devices than Facebook has been able to create. Venture capitalist and principal of Union Square Ventures Fred Wilson noted during a recent talk at Columbia Journalism School in New York City that in spite of the large percentage of Facebook users moving to mobile, usage of other social-networking apps is also still growing rapidly. And in some cases, he said that users may be more engaged with alternative social networking apps on their phones that are specific to the mobile platform.
"Facebook has mobile versions of its sites," he said. "But it's a crunched down experience."
Urban Airship's Kveton agrees. "If you think about Facebook trying to cram its entire feature set onto a phone, it's tricky," he said.
Still, he said, that the opportunity for Facebook on mobile is immense, even with more competition from other social-networking apps.
"Processing power on devices will get faster, networks will improve, screens will get sharper, and location services will get more accurate," he said. "So there is still a huge opportunity for social app developers to carve out a niche in mobile, and Facebook is included in that."
The question now is whether Facebook will be able to turn all those eyeballs gazing at its mobile app on cell phones and tablets into a revenue stream.