Big Bang 3 Redux: Facebook’s Mobile Problem

I was wrong.

The Facebook S-1 does NOT say that “our CEO is 27 and has limited prior employment history.”

But it does say a lot. There’s a lot to cheer about in the S-1, including three years of profitability and a solid engine of free cash flow clearly in the beginning stages of revving up. Some wags may note that the concentration of shares founder Mark Zuckerberg’s control is not necessarily a positive. But Zuck’s track record—and use of control so far—has been an unambiguous positive for Facebook.

The big revelation for me was not the cool billion in profit or the rocket-ship revenue growth (88% over 2010!). It was a change in user patterns—not a rival—is Facebook’s biggest threat. Specifically, we are all accessing Facebook more and more through mobile devices, and those devices typically do not display ads, which account for about 88 percent of Facebook’s revenue:

Growth in use of Facebook through our mobile products, where we do not currently display ads, as a substitute for use on personal computers may negatively affect our revenue and financial results.

We had more than 425 million MAUs [monthly average users] who used Facebook mobile products in December 2011. We anticipate that the rate of growth in mobile users will continue to exceed the growth rate of our overall MAUs for the foreseeable future, in part due to our focus on developing mobile products to encourage mobile usage of Facebook. 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. Accordingly, if users continue to increasingly access Facebook mobile products as a substitute for access through personal computers, and if we are unable to successfully implement monetization strategies for our mobile users, our revenue and financial results may be negatively affected.

Facebook user growth and engagement on mobile devices depend upon effective operation with mobile operating systems, networks, and standards that we do not control.

There is no guarantee that popular mobile devices will continue to feature Facebook, or that mobile device users will continue to use Facebook rather than competing products. 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. Additionally, in order to deliver high quality mobile products, it is important that our products work well with a range of mobile technologies, systems, networks, and standards that we do not control. We may not be successful in developing relationships with key participants in the mobile industry or in developing products that operate effectively with these technologies, systems, networks, or standards. In the event that it is more difficult for our users to access and use Facebook on their mobile devices, or if our users choose not to access or use Facebook on their mobile devices or use mobile products that do not offer access to Facebook, our user growth and user engagement could be harmed.

To me, this section really stood out for its relevance and specificity, in a section that is typically dominated by “risks” like “we may fail to always be awesome.” In this context, Google’s $750 million acquisition of AdMob and Apple’s $287 million acquisition of competitor Quattro make a lot of sense. Investment bankers will surely be lighting up the mobile phones of Facebook’s BizDev team with prospectuses for Madvertise, BuzzCity, and Adfonic and other “blind” mobile advertising networks. Either way. it’s clear: it’s a great time to be a securities lawyer in Silicon Valley.

My colleagues Steve Gilmor and John Taschek for deeper into Facebook’s page turner on the Gilmor Gang:

Let Big Bang 3 begin!