By: Gigaom
Facebook just revealed its Kryptonite: mobile
In its IPO filing Facebook mentioned the word "mobile" 123 times, but didn't use the term in positive ways. In fact, Facebook’s S-1 filing is one big warning to investors: its growth is being driven by user behavior that it has so far failed to monetize.

In its IPO filing Facebook mentioned the word “mobile” 123 times, which given the term’s buzz worthy status is hardly surprising. But in most cases Facebook didn’t use the word mobile in positive ways. In fact, it identified the proliferation of traffic to its mobile app and website as the biggest risks that its advertising-driven business model faces. The S-1 filing is one big official warning to potential investors: Facebook’s future growth is being driven by user behavior that it has so far failed to monetize.

Of Facebook’s 845 million monthly active users (MAUs), 425 million accessed Facebook in December alone through a smart-or feature phone app or through its mobile-optimized website. In 2011, 85 percent of Facebook’s $3.7 billion in revenues came from advertising, but none of it from its mobile platforms, over which it doesn’t serve up display ads. Despite that huge gap, Facebook is doing nothing to discourage the shift in use to handsets and tablets:

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.

As the S-1 points out, most Facebook members use mobile to supplement their PC activity, not replace it, so the company does ultimately put its ads in front of their eyes. But that won’t always be the case. As my colleague Mathew Ingram pointed out on Wednesday, Facebook and its ambitious CEO Mark Zuckerberg want to rewire the structure of society, making its social network a common medium for meaningful connections between all the world’s peoples and all the world’s institutions. It’s a grand vision, but it also depends on establishing connections to billions of devices that aren’t PCs.

One telling figure in the filing is Facebook’s estimates of its penetration in India, which it pegs at between 20 to 30 percent. India is the world’s second largest market, but very few of its 1 billion-plus people have PCs or the means to access one. There are 700 million to 800 million potential Indian customers for Facebook, and for most of them the social network will be a mobile-only platform.

In the developed world, PC penetration is much higher, but younger generations are increasingly relying on their handsets as their primary means to access the Internet. PC sales are falling off as well, replaced by tablets – another platform Facebook doesn’t utilize for display ads.

A problem with an easy solution

Facebook’s problem has an easy fix: it can simply start putting ads in its mobile apps and website. According to inneractive, the mobile advertising market is booming with ad spending up 464 percent since February of last year, and with a huge 983 percent boost in North American ad spend alone. Berg Insight predicts that mobile will account for 15% of all global online ad sales by 2016, making it a $22.5 billion market. Facebook itself in its S-1 estimated that the global mobile ad market in 2010 was $1.5 billion, a market it easily could have tapped into.

My guess is that Facebook just doesn’t want to put apps into its mobile products – at least not yet. There’s limited real-estate on a handset screen and Facebook probably doesn’t want to clutter up its slick interfaces with display ads, especially while it’s still formulating its mobile strategy. The company is also trying to develop more innocuous ways of advertising on the small screen. In its S-1 it mentioned the possibility of inserting “sponsored stories” in its members news feeds.

Though it didn’t mention it in its filing, Facebook may also be investigating non-advertising means of monetizing mobile traffic. While the social network has free rein in the PC browser, its actions in mobile are limited by the capabilities of devices its mobile apps reside on, as well as the whims of the vendors who make those devices and the carriers who sell them. Though no operator or OS maker would be insane enough to block the world’s most popular social network, that co-dependence may require Facebook to partner more closely with key players in the wireless industry, and that, in turn, could lead to revenue opportunities.

France Telecom’s Orange is already working closely with Facebook to sell phones optimized for its social networking features in many of its developed and developing markets. In some countries, Orange is selling plans that include unlimited Facebook access while metering all other data use. The carrier and Facebook haven’t revealed any financial details of the their deal, but I would not be surprised if some of those revenues were making their way back to Menlo Park.

Either way, Facebook’s filing makes it clear that it has to do something to monetize its mobile traffic soon. The company will soon be public, and while it will be likely be controlled by Zuckerberg and those loyal to him, investors will question why Facebook is devoting so much effort and so many resources to building a mobile business it makes absolutely no money from.

Image courtesy of Flickr user lrargerich

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