Large companies often have trouble breaking into new revenue-generating vertical markets. As Facebook barrels into its much-anticipated initial public offering today, the question for investors and analysts will be: How does Facebook start making money from its huge mobile presence? While it may seem like Facebook has completely dropped the ball on mobile monetization, there is plenty of time and avenues for the social behemoth to make money from its mobile eyeballs.

To understand where Facebook is with its mobile products, one must understand the problems that big companies deal with in rolling out new revenue-generating products. There are four phases, which author Geoffrey Moore calls “horizons,” for revenue-generating products at any given company:

  • Horizon 1: Established products that are generating revenue.
  • Horizon 2: Go-to-market products that are out of the research and development phase and are making the painful birth into a new revenue category for the company.
  • Horizon 3: Products that are in R&D and may or may not constitute the future of the company.
  • Horizon 4: End-of-life products that have long been revenue generators for the company but may have outlived their usefulness. 

Right now, the challenge for Facebook is to take its mobile monetization strategies and any resulting new products out of Horizon 3, see them through Horizon 2, and firmly establish them as Horizon 1 products. Many large companies struggle with Horizon 2 because of the need to allocate resources to a project that may not see actual revenue any time soon. It is a critical stage for a company as it looks to expand its categorical product portfolio.

In its initial S-1 filing for its IPO, Facebook identified making money from mobile as perhaps its biggest risk. We analyzed the avenues that Facebook could take to make money from mobile and found that there are several distinct directions the company could go, from direct and indirect ad placement, to creating an application store, to payments (Facebook Credits). Most of Facebook’s mobile monetization will come from advertising in one form or another.

“Mobile should be a huge priority for the Facebook team, especially given the IPO. Traffic to social media sites on the Jumptap network from January 2011 – January 2012 grew 107% and had a 28% uplift in CTR for ads on the channel when combined with outside data sources. The social networking channel remains one of the most popular for our top verticals, including auto, retail and CPG," said Paran Johar, CMO at Jumptap. "There is an incredible opportunity for Facebook to monetize their massive mobile presence. Thirty-three percent of their traffic comes from mobile devices, and 85% of their $3.7 billion in revenue comes from advertising; monetizing mobile is a billion-dollar opportunity."

Where Facebook Can Take Mobile

There are several different types of advertising that Facebook could implement in mobile. The easiest would likely be interstitial and banner ads within Facebook’s native apps and mobile Web presence. That should not be a problem for the company on larger mobile screens, like the iPad, but creating effective ads for screens smaller than five inches has proved problematic not just for Facebook, but almost every other mobile ad network as well. 

Facebook can also capitalize on the “interest graph” it has created through its social graph platform and its newer OpenGraph applications, such as The Washington Post Social Reader or SocialCam. This is essentially what Facebook is doing on its desktop platform - targeting ads to people based on their interests. How to achieve that on mobile while still optimizing screen real estate and not alienating users (or infringing on privacy) will be the hardest part for Facebook. 

The most alluring prospect for Facebook may have to do with location-aware push notifications. Facebook has recently started adding location to users’ posts on both desktop and mobile platforms. This feature can be turned off, but the way Facebook pushed it out recently to users shows that it is deeply interested in associating location with user updates. A recent Facebook acquisition, ambient social location startup Glancee, could prove very useful in this area. Glancee knows where you are, runs in the background of your phone and tells you when a friend of yours is nearby. When integrated within Facebook, that could be a powerful tool. Thinking a step further though, Facebook could also use Glancee’s technology to connect not just people to people, but also people to stores, merchants and restaurants. All Glancee needs to do is treat physical locations like it does people and add some type of incentive for the user to go to that business, with which Facebook has presumably cut a deal. That could be a location-aware push notification based on your interest graph. For instance, I like sports, I am passing a sports bar that is offering happy-hour specials, I get a push notification. Facebook makes money, the location makes money, I get beer. Everyone is happy. 

App Happiness

Then there are the apps. A good portion of Facebook’s revenue is tied to apps in one form or another. The most lucrative of those are games, as Zynga has shown by riding its partnership with Facebook to its own IPO. Facebook’s original intent with its apps ecosystem was to let users spread apps through viral channels in much the same way that Farmville and MafiaWars became popular. That worked for a while and still has potential to be a good source of app enlistment for the company, but Facebook apps needed a boost beyond viral community growth. Hence, the social platform unveiled its App Center last week to act as a central repository for apps tied to the Facebook platform.

The App Center will prove pivotal in the way Facebook approaches mobile monetization. The center can sell mobile Web apps and bolster Facebook's Credits program, but it also can extend Facebook's presence in both the Apple App Store and Android Google Play. There is an interesting advertising opportunity here, as well. What if Facebook were to tie all of the apps that use its platform to its own advertising service? Then, if I am playing Draw Something and seeing ads, those are Facebook ads, not just ads served from some random ad network to which the developer tied its app. 

The ability to unleash interest graph-based mobile ads outside of Facebook’s actual owned and operated properties could have great potential both for social app developers and the social platform. Think of it as Google’s AdMob program, but tied to mobile social apps. 

The challenge for Facebook now will be to take these varying initiatives (like Glancee, App Center and even Instagram) out of Horizon 3 and push them through Horizon 2. Moore cautions companies that going to market with new categorical revenue generators is extremely difficult and should be done one at a time, so that each can be done right and done quickly. Going to market with new products one at a time has never exactly been Facebook’s strong suit. It likes to, “build fast, break things and fix them" as quickly as possible.

Facebook does not need to institute every idea it has for mobile monetization right away. It just needs to take its best idea, make sure it is as strong as possible and unleash it on the public. 

If Facebook can ever figure out how to really make money off of the hundreds of millions of people that use its mobile platform, then there is definitely sunshine on the horizon.