Facebook Keen on SMBs But Not on Monetizing WhatsApp

According to BIA/KELSEY, spending on local media by small to medium-sized businesses (SMBs) will reach $50.4 billion in 2015, representing 35.8% of total local media spending in the US. Out of this, SMBs are expected to spend $12.4 billion on digital media. Facebook (NASDAQ: FB) is looking to tap this market with its focus on SMBs.

Facebook’s Financials

For the recently reported third quarter, Facebook’s revenues grew 41% over the year to $4.5 billion, ahead of the Street’s forecast of $4.37 billion. EPS of $0.57 was also ahead of the market’s forecast of $0.52 for the quarter.

By segment, advertising revenues grew 45% over the year to $4. 3 billion. There are more than 2.5 million active advertisers on Facebook and more than 45 million small and medium-sized businesses actively using Facebook pages. The average price per ad increased 61% during the quarter while total ad impressions declined 10% on a year-over-year basis. Regionally, US and Canada and Asia-Pacific were the strongest markets, producing ad revenue growth of 56% and 48%, respectively. Europe and Rest of World grew more slowly at 33% and 29%, respectively, due to currency exposure.

Revenues from payments and other sources fell 18% to $202 million, driven by a reduction in payments revenue related to games played on personal computers.

Facebook has been capitalizing on the shift to mobile. Mobile advertising accounted for 78% of advertising revenues compared with a 66% share reported a year ago. Among operating metrics, Facebook’s daily active user base increased 17% over the year to 1.01 billion for September 2015 with mobile daily users increasing 27% to 894 million. Monthly active users grew 14% over the year to 1.55 billion with mobile users growing 23% to 1.39 billion.

On WhatsApp Monetization

On Instagram, Facebook has introduced new ad formats and objectives, opened up the API, and launched self-serve ad capabilities. Messenger has over 700 million users and WhatsApp has over 900 million users. However, during the earnings call in response to a question on the monetization of WhatsApp, the company said,

“The focus really for our messaging products is to continue to drive user growth and continue to build great products that are fast, useful, engaging and fun.”

I have my concerns about this strategy. Facebook had acquired WhatsApp last year for $22 billion or $55 per user. At that time, WhatsApp had 400 million users. Now with 900 million users at even a subscription rate of $1 per year, which is cheap for most users to pay, Facebook would be making close to $1 billion. It should not throw away that opportunity.

Improving Search

Investors should however be pleased with Facebook’s efforts to improve its search functionalities as a more general source of information as well as news.

Facebook recently launched its Instant Articles publishing platform, which has been adopted by publishing giants like The Washington Post. While the general search functionality leaves a lot to be desired, the improving news functionality could mean trouble for Twitter, which is currently struggling to broaden its appeal. However, the publishers have not yet adopted the platform, and it is unclear that they will.

Facebook’s SMB Focus

What I am keen to see is how Facebook executes on its SMB focus. It aims to help SMBs in creating an online presence for free and then lure them to their paid products. It says over 80% of its 2.5 million advertisers started on its free product Pages and then moved to simplified ad products.

Advertising for small businesses on Facebook has been challenging. Likes don’t necessarily turn into sales. One small business that I have seen use Facebook advertising successfully is Smoked Auctions. Read my interview its founders Amy Laws and Nicole Brewer to see how they used comment-selling to generate leads and transactions out of Facebook. But in general, while Facebook is a better awareness building tool than a conversion tool. On that score, Google still reigns supreme with its AdWords product.

Anyhow, the market is pleased with Facebook’s moves. Its stock is trading at $108.02 with a market capitalization of $305.45 billion. It touched a record high of $110.65 last week.