Why The Move To Mobile Is Bearish For Internet Titans

“Growth in use of Facebook through our mobile products, where our ability to monetize is unproven, as a substitute for use on personal computers may negatively affect our revenue and financial results…”

– From the “Risk Factors” section of the amended S-1 registration statement for Facebook (FB), filed May 16th

“To date, we have not been able to generate revenue from our advertising products delivered to mobile devices as effectively as we have for our advertising products served on traditional computers.”

– From the “Risk Factors” section of the Pandora Media (P) 10-K, filed March 19th

“The decrease in the average cost-per-click paid by our advertisers was driven by various factors..[including] the changes in platform mix due to traffic growth in mobile devices, where the average cost-per-click is typically lower compared to desktop computers and tablets…”

– From the Google (GOOG) 10-K, filed April 25th The movement to mobile devices — such as smartphones and tablets, notably the iPad from Apple (AAPL) — is severely impacting the profitability of companies that derive their revenues from Internet advertising. The quotes above from SEC filings of three of the giants of online advertising show that the mobile transition is becoming a significant headwind for revenue and profit growth in the sector. The lower resolution and simpler design of many mobile browsers is one issue, but the most obvious — and most important — is simply screen size. Look at the difference between Google searches for the keyword “seeking alpha”: (click to enlarge)GOOG (click to enlarge) GOOG It doesn’t take an advertising expert to see the vastly smaller real estate available on the mobile browser. The empty space on the desktop search — often used by Google to place sponsored ads — simply does not exist on the iPhone. Making matters worse for Google, it sends an estimated 75% of its iPhone search revenue to Apple, dragging its revenue per mobile user even lower relative to its legacy desktop search. The increase in mobile usage has been sharp, and continues to accelerate into 2012. Pandora saw mobile listening rise from 5% of total usage in fiscal 2009 (ending January 31st) to 24% in FY10 to 51% in FY11, and, finally, 65 percent in fiscal 2012. CEO Joe Kennedy noted on the Q1 conference call last week that the number was now closer to roughly 70 percent, “with a modest upward trend.” For Facebook, over half of its users accessed their accounts through less-profitable mobile devices in March 2012, according to its S-1. The company “anticipate[s] that the rate of growth in mobile usage will exceed the growth in usage through personal computers for the foreseeable future,” according to the same filing. In the short term, this trend should impact earnings at the three firms. In the first quarter, Pandora generated 55% of its advertising revenue from mobile, yet saw 70% of its listening hours in the segment. As such,


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