- Facebook has launched Facebook Lite, a stripped-down Android app aimed at emerging markets.
- The new app can help the company to keep growing its user base.
- This appears to be a well-timed move given how important international markets have become for Facebook’s growth.
Giant social media company, Facebook (NASDAQ:FB), recently launched Facebook Lite, a stripped down Android app version of the popular Facebook App, which is aimed at emerging market users with less powerful phones and data connections. The new app includes Facebook’s core features such as news feeds, photos, status updates, notifications and other key features, but lacks bandwidth-heavy features such as video. Meanwhile, full-resolution photos are only displayed when the user taps on a photo thumbnail. The app is designed to work on any Android phone and to load quickly even when running on 2G networks. Facebook is looking to leverage Facebook Lite to reach unpenetrated regions.
The new app appears to be a well-timed and smart move by Facebook, whose top line is mostly driven by international markets. Smartphone adoption in developing economies still lags penetration rates in the developed world. Smartphone penetration rates in many developed economies stand at 70%-80% compared to 15%-20% in underdeveloped economies. The same rings holds true for 3G and 4G penetration. Developing economies tend to be starved of lite apps that work well with slower mobile phones and data connections. Facebook is a bandwidth-dense app, and can take ages to load or even fail to load properly on slow Internet connections. Facebook Lite is a perfect complement for stressed infrastructure areas. The app is likely to enjoy rapid adoption due to Facebook’s powerful brand recognition and the huge network effect Facebook enjoys courtesy of its 1.44 billion users.
Facebook needs to continue growing its user base if it’s to remain a top destination for marketers. The company relies on ad revenue for more than 90% of its top line, and user growth translates to top line growth. The ad landscape is rapidly shifting with marketers giving preference to cheaper programmatic ads over traditional display ads. Several companies including Yelp (NASDAQ:YELP), Yahoo (NASDAQ:YHOO) and LinkedIn (NYSE:LNKD) blamed their poor results and soft guidance on the shift to programmatic advertising. Programmatic ads are better at targeting the right audiences yet sport lower CPM rates, hence the love affair with marketers. Facebook has responded to the disruption by featuring higher-quality ads with higher CPM rates. The platform is still viewed as a top ad destination by marketers due to its huge user base and the fact that it can easily leverage its huge cache of user data to better target audiences.
Facebook added 48 million new monthly active users, or MAUs, during the first quarter, of which 40 million came from outside North America and Europe. The social networking company has for long relied heavily on its lucrative U.S. and Canadian markets to drive growth. But the tables have turned, with international markets bringing in 53.4% of Facebook’s revenue during the first quarter. Nevertheless, Facebook’s North American ARPU, or average revenue per user, still leads the rest of the world by a wide margin. ARPU in the U.S. and Canada clocked $7.58 during the quarter after growing 42%, outpacing worldwide ARPU which came in at $2.50 after increasing 25%. ARPU in the Asia-Pacific region was $1.11 after growing 27% while the rest of the world brought up the rear with ARPU clocking in at a rather anemic $0.76 after growing 14%.
Room to Run
Despite poor monetization rates in international markets, Facebook still has plenty of room to run. The poor monetization rates in developing economies can be chalked up to lower user engagement, lower ad loads and lower CPM rates for ads in these markets. Facebook has mainly been focusing more on its lucrative international markets. During the last quarter, it increased price per ad by 285%, which resulted in a 62% drop in number of ads sold. The company, nevertheless, was still able to realize a healthy 46% growth in ad revenue.
The huge drop in ad inventory sold after the massive price increase tells you that Facebook cannot continue increasing ad prices indefinitely without impinging on growth at some point. A better growth alternative would be to try and monetize its international markets better. The easiest way for the company to achieve this is by rapidly expanding the number of users in these markets. Facebook Lite will be of help here. Facebook can also ramp up advertising in these markets and also gradually increase ad prices as the global economy continues to improve.
Facebook Lite appears to be a well-timed move by Facebook as it could fuel Facebook revenue growth. The new app can help the company reach underpenetrated regions of the world where data connections are typically slow. This is where most of Facebook’s growth will come from in the future.
Also see: Our fundamentals based Facebook Stock Analysis video.