How is Facebook going to make the big money?


Facebook (Nasdaq: FB) is free and always will be. It says it right there on the home page before you login. That value proposition has certainly helped the social-networking king garner a worldwide user base of 901 million monthly active users, or MAUs.

The company has now gone public, and public investors are going to want to see lots of dollars coming in to keep their interest. How is Facebook going to increase user monetisation now that its user base has reached critical mass?

Stop me if you’ve heard this one before
Of course, Facebook has traditionally done this through advertising, which is why Google (Nasdaq: GOOG) doesn’t take so kindly to the increasing amount of time people spend on Facebook’s site as opposed to its own. The bulk of revenue continues to be generated through traditional display ads, which is the oldest Internet business model since the dawn of — well, since the dawn of the Internet.

Facebook has been working to diversify its revenue base and grow its payments-and-other-fees segment, which has mostly worked well over the past few years. Two years ago, advertising was 98.5% of sales, and that figure has dropped to 82.4% last quarter.

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Source: Facebook S-1 Registration Statement.

Payments are generated through Facebook’s platform, which so far is mostly thanks to Zynga (Nasdaq: ZNGA) . Facebook’s S-1 registration statement makes it clear: “To date, games from Zynga have generated the majority of our payments and other fees revenue.” This revenue stream is directly threatened by Zynga’s own new platform that it launched a few months ago on Zynga.com.

For now, Zynga.com will continue to use Facebook Credits as the primary virtual currency, but this arrangement is pretty clearly just part of Zynga’s longer-term plan to transition itself away from relying on Facebook. This way, players can continue using the Facebook Credits they’re already familiar with and may have already paid for, but the seeds are now sown for an eventual move away from Facebook Credits that will hurt Facebook’s top line.

Keep in mind that the pair has an agreement where Facebook keeps a 30% cut of Zynga user purchases made on Facebook’s platform — an agreement that expires in three years. It’s a safe bet that Zynga wants to become a gatekeeper of its own for Zynga.com, eventually collecting a cut on sales made on its platform.

What’s a social network to do?
So Facebook is now scratching its head, pondering how else it can monetize all those MAUs. Average revenue per user, or ARPU, has been trending higher, and it’s going to need to branch out to keep that trend going, especially in light of the competitive threat from Zynga on the revenue stream it was just starting to enjoy.

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Source: Facebook S-1 Registration Statement.

 

The company is now experimenting, much as Google is known for, with new methods of monetisation and moat building.

Is there a social app for that?
Facebook has just introduced its new App Center, a social-app discovery service that’s taking a direct shot at Apple‘s (Nasdaq: AAPL) ability to help users find relevant apps among its swelling stable of 635,000 apps and counting. Apple recently acquired app-discovery startup Chomp for an estimated $50 million to beef up its app-discovery abilities, as its Genius feature has never been a show-stealer. Apps will be ranked based on user ratings, engagement, and other quality metrics to determine whether they make the cut.

Facebook’s App Center isn’t a new mobile-app storefront, since it will be built directly into Facebook’s mobile app and users will still need to download mobile apps through Apple’s App Store or Google Play. This move is really more about building a moat to keep users on Facebook’s platform, as the App Center will be integrated with Facebook’s desktop platform.

It’s a subtle way to drive Facebookers from its mobile app, which it has difficulty monetising, to its desktop platform, where it’s improving monetisation.

The price of importance
An even more interesting new feature that Facebook is testing is the ability to “Highlight” a particular post or status update, giving it priority in news feeds — not entirely unlike Google’s sponsored ads in search results. Facebook recently disclosed that the average post reaches only 12% of a user’s friends, in part because friends can change what types of updates they see.

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Source: TechCrunch.

 

For a nominal fee, a user can make sure friends see a post that’s been “Highlighted” as important. Part of the test for this feature includes a free “Highlight” to gauge interest, as well as the paid option shown above to see whether users are willing to pay for something like this. “Highlighted” posts may be given prominence in feeds, remain visible for longer periods of time, and show up for more friends.

It’s a risky move, but it was spotted in New Zealand, a relatively safer test ground than the United States and Canada in case it backfires. Now, if this particular feature were to be warmly received (which is doubtful), it could do wonders for monetisation and ARPU.

Worldwide ARPU was $1.21 last quarter. If you opt to pay $2 to “Highlight” a single post, you’re contributing more revenue from that one post than Facebook generated from the average user throughout the entire quarter. Even the United States and Canada’s highest ARPU of $2.86 could see meaningful upside if “Highlight” works out, although I have doubts on this one.

All eyes on Facebook
The public pressure is about to be turned on to keep growing sales, and Facebook is obviously well attuned to that fact. Testing new ways to monetise its user base is a requisite for its long-term success, especially from an investor’s perspective.

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The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

A version of this article, written by Evan Niu, originally appeared on fool.com

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