1. Rough Waters for Facebook in the Era of Mobile
Facebook's faltering stock price since the IPO shows clearly its has not yet the right
business model. The social networks staff selling their stocks this week is the next
great threat to its stock price. The decline in market value shows a fundamental
strategic problem for the social networkers that want to make the world a better
place. The smartphone revolution threatens Facebook's advertising business.
Facebook is on its way down. The value of its stock has decreased by around 45
percent since it has gone public 90 days ago; it could still fall further. Thursday the
holding period for 271 million employee shareswill expire. Selling partof the
employee stockswilldepress the price further.
It's possible that Facebook gets away unscathed, because most employees who want
to sell, have done it in advance by warrant. In this case the end of the holding period
would be already priced in. Nevertheless, the stock is likely to remain under
pressure, because other holding periods are running out in the coming months.
That fact that Facebook has to deal with such mundane things as expiration of the
holding period is characteristic for the shift Facebook faces. As recent as May 18th,
the date of their IPO, FB has been hailed as the new star. The stock has been so
heavily overvalued that the company's value even after the crashis still more than

2. 48-times its annual income of 2011. FB’s market cap is about the same as
behemoths like Colgate Palmolive, Monsanto, Sumitomo, DuPont, or Nike. A market
cap of 48 billion dollars seems super optimistic for a company with such an
uncertain outlook even when considering that we talk about the touted digital
industry.
The share price reflects the hope that Facebook could somehow grow exponentially
in the coming years. But the business model of the social network has been shaken
to the bones. The boom of Internet-enabled mobile phones is the responsible game
changer. About 6 Billion people have had a mobile phone end of 2011. There are
more people with a mobile phone than are connected to the electrical grid. Not only
Facebook is in trouble, even Google and other web giants who earn their money
mainly with online advertising.
The Dawn of a New Web Era
Gartner estimates that in the coming year the worldwide Internet access via mobile
phone and tablet will be larger than the traffic from the PC at home or the officefor
the first time. Facebook experiences the mobile revolution already; more than half
of its roughly 955 million users access the FB app from their phone. Many of us use
mobile devices for our daily FB access. A recentsurvey of Google users shows similar
results for web search.
This leads to the following issues.The page views on smartphones bring only a
fraction of the always-connected ad revenue.New business models that compensate
for these losses are still under development. I’m not sure that the usual suspects will
be able transfer their always-connected Internet market leadership to the mobile
web.
We are at the beginning of a new era, the third Internet era of mobile Web and
interest networks. The first era was Web portals like Yahoo and Google search
engine. Facebook, LinkedIn and Zynga, have dominated the second era,the so-called
social Web. Each Web era had its special needs. Usually the rulers of one age had
difficulties adjusting to the dawn of a new era. Jay Jamison calls the mobile era the
Web 3.0 in hisIT blog at TechCrunch.
The Web 1.0 pioneer AOL plays no role any more. Yahoo is a company that needs
severe surgery. Google is still brilliant, but it earnsits billions almost exclusively
with its Web 1.0 business model of Internet search. Its ad sense churn rate is about
70% and its social network Google+ is a far cry from Facebook's success.
Facebook has announced during its IPO to expand its mobile activities significantly.
My friends at FB say that CEO Mark Zuckerberg testsall new features first on his

3. phone. Implementing its mobile strategy Facebook faces similar problems as Google
with its social network .The change requires nothing less than a cultural change.
Context on the Mobile Induces A Culture Change for App Design
When surfing the Internet on the phone we expect a very different app behavior
than on the laptop, though we use the same information from the Web. Mobile
services have tobe context rich. This means they have to include location (from the
GPS of the phone), user preferences, friends nearby and integrated payment via e-
wallet (in the very near future). Mobile apps have to display less information on the
small display and have to be usable with fewer clicks. This means they must be very
well tailored to the task at hand – be it finding a nearby taxi, or a nearby fish
restaurant recommended by friends.
Facebook’s approach seems very different. We are presented with more and more
information that pushes us to ever-greater screens with higher resolution in order
to display status messages, invitations to parties, games, advertising, chat and much
more. Facebook has just transferred this app with its wealth of information from the
static web to our mobile. The FB app seems overloaded, while the value of its
location and context-aware services is very limited.
Companies that have designed their apps from the beginningfor the mobile web
deliver much better user experience closer to the customer. A mobile food service is
just about spotting personal restaurant recommendations and about showing its
users how it is cooked for example. One app per task is the credo of the mobile app
leaders like Apple, Amazon (Kindle) and Twitter.
Take the mobile photo community Instagramfor example. Yahoo's photo service
Flickr and Facebook's picture upload look shabby compared to Instagram.
Instagramhas gathered more than 80 million users in roughly two years. Early April,
Facebook bought the service for a billion dollars.
The New World of Advertising and Interest Networks
The mobile web changes the business models too. Companies who finance
themselves mainly through advertising face a problem. User attention on the phone
is different from the PC at home. Banners have not been made for the small mobile
phone screens.
Advertising has to change from passive consumption to active participation. Take
for instance the Groupon++ startup LOCALsense and mutu,a music video aggregator.
Both startups integrate the user. LOCALSense rewards the user when he or she
passes coupons on to friends; a cool way to learn about a person’s interest network.

4. Who of my friends likes coffee, sailing, or go to the movies?All this information
about the interests of my friends is freely available for LOCALsense but very hard to
get for FB. How does FB even know what types of friends I have? How do they
knowwho of my roughly 1000 friends is family, close friend, co-worker or business
friend? They ask me to categorize. Well, this is the reason why Google+ fails with
circles. Who on earth is going to keep all these relationships up to date manually?
Interest networks go much further by understanding that a friend is multifaceted
with regards to how we interact. We may sail together and be close friends or we
share a passion for movies and be co-workers.LOCALSense analyzes the
connections, interactions and buying behavior at local stores with the advanced
analytics platform Saffron Technology in real time and automatically.
Mutuaggregates music videos and predicts customer taste in order to offer a
Pandora like service to its listeners. Mutu starts out with an innovative business
model. Besides ad revenue it earns money by selling back to the producers of music
videos what videos people like, how long they watch them and what they share with
their friends.
I think there will be two big revenue streams on mobile, gaming and interest
networks. End of last year I have been on a panel with Bill Chang, Chief Scientist of
Baidu in Shanghai, organized by Erik Brynjolfsson from MIT Sloan School. Bill
predicted that gaming would be the most popular mobile apps in China. Gamming
apps need context, interest networks and location too.
The successful companies of the information age will generate value by creating
information from the ever growing sea of Big Data. Think about GE opening a center
for Big Data analytics in the Silicon Valley for 1 billion dollars. GE intends to sell
services and the value add it will generate from operations data – railroad traffic
and congestions, or usage data of its medical equipment in hospitals.
Marketers know all that intuitively therefore they pay less for mobile ads. 1000
clicks on a mobile ad banner cost 35-40 cents according to the venture capital
company Kleiner Perkins. Ads on Web pages sell up to 20 times more expensive.
The lowerad prices are reflected in the balance sheets of web companies like Google
and Facebook. Google whose revenuedepends more than 90 percent onadvertising
has shown steadilydeclining per click sales in the past three quarters; in the last
quarter sales have dropped by as much as 16 percent. Google’s countermeasure is
it’s free mobile operating system Android. This ensures that the Google has at least
access to the handset market, and thus potentially to millions of advertisers. Where
is the business model here? So far I see only Samsung making money with Android
smart phones.
Facebook's revenue depends to 85 percent on advertising too. Revenue has slowed
down because ad sales and user numbers grow less than some month ago. The

5. increase in ad revenue in 2011 was still 88 percent while it slowed to 45 percent in
the first quarter and 32 percent in the second quarter of 2012.
This ailing growth is incompatible with the high expectations for the Facebook
stocks. They need a new growth strategy for the mobile web. Transferring
overloaded web apps on the mobile Web has shown very modest returns. Recently,
Facebook has started to mingle ads with status messages when the user or their
friends are befriended with the respective company. This seems the right direction,
user interaction using context and the wealth of data FB has gathered about us.
According to FB, its making half a million dollars in sales per day with these mingled
adds.
Customers rather than clicks
Other companieshave been off to a better start when monetizing mobile ads. Those
Web 3.0 companies understand marketers asking, why pay for clicks when one can
steer customers via mobile ads to a shop, restaurant or service?
Another location based social app I would like to mention is Waze, an app that
combines GPS with asocial network. Motorists transfer their speed while
commuting to work. Waze calculates road conditions from the speed taking into
account reports from fellow drivers and delivers turn by turn navigation that
automatically re-routes you when road conditions change.This is a great example of
how dynamic interest networks are unlike the static social networks. I don’t even
know the people who are in my interest network when driving to work. Still the
commuters’ community helps each other to get faster to work.
Actually, Facebook, Google and the other incumbents arein the best staring position
to deliver mobile services around interest networks. They have more users than any
new Web 3.0 mobile community and therefore command the reach needed to get
such services off the ground. However, the incumbents are currently not the ones
driving the mobile revolution. I’m having a déjà vu from the Web portals era when
the Web 2.0 newcomers ate the lunch of the Web 1.0 crowed.