26th July 2012
The games maker, which provided 15% of Facebook's revenue in the first three months of the year, blamed the disappointing figures on platform changes at the social network. As Eric Eldon at TechCrunch explains, Facebook prioritises new games in its feeds at the cost of established titles such as Zynga's Farmville.
Although the idea that Facebook's own innovations are cannibalising its revenue streams may be quite amusing, few shareholders will be sharing the joke. Having been values at $38 a share at its IPO in May the company's share price dropped below $28 yesterday, a fall of over 25% from peak.
Some will see these sharp falls as an opportunity either to top up their investment or dip their toe in for the first time. Now that the euphoria over the IPO and the recriminations that followed have largely abated, it is possible that the market may finally be finding a more realistic price range for the stock to trade at.
Yet the latest blow comes at a particularly awkward time for Chief Executive Mark Zuckerberg as the first quarterly results are due to be announced on Thursday. Given the torrid time investors have suffered over the past few months they will be hoping to see signs that the business has shrugged off doubters and maintained a solid growth trajectory.
What they will also want to see is Facebook taking steps to monetise the growing mobile market, which has long cast a shadow over the prospects for the company. In an update to its S-1 filing in May it was forced to acknowledge:
"Increased usage of Facebook on mobile devices has contributed to the recent trend of our daily active users (DAUs) increasing more rapidly than the increase in the number of ads delivered. If users 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, or if we incur excessive expenses in this effort, our financial performance and ability to grow revenue would be negatively affected."
Indeed the fate of both Zynga and Facebook in this area are very much intertwined. Even in its more successful first quarter results the games maker conceded that although the total number of active users grew 20% over the three months, the revenue generated per user fell by 10% due to less profitable mobile usage.
These problems, however, may reflect more fundamental weaknesses in the business models. A study by Wordstream comparing Facebook to the Google Display Network found that the click-through rate of adverts on the social network was a paltry 0.051% over 2010 compared to Google's 0.4% – almost 10 times lower.
This inability to convert the potential that the network offers advertisers in terms of targeted campaigns may well prove to be the elephant in the room. Seen this way the growth of mobile users may simply be clouding underlying difficulties that it is struggling to overcome.
In order to maintain the buzz surrounding the business, Zuckerman needs to convince shareholders that his team has a strategy to address these shortcomings. If he fails yesterday's share price falls could serve as a warning of more pain to come.
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