Despite a pervasive belief that mobile is the Next Big Thing, investors continue to ding its most likely winners and celebrate its revenue losers. So while Instagram can command a $1 billion valuation on roughly $0.00 in mobile revenues, Facebook sees its stock continue to slump on more than $1.2 billion in annual mobile advertising revenue.
On the one hand, some of this disparity just comes down to hope. It's easy for investors to pummel Facebook and Google for not mixing a magical mobile advertising elixir, especially when such companies are struggling to increase mobile revenues without cutting too deeply into their desktop advertising revenues. Hence, as Benjamin Schachter, an analyst at Macquarie Securities, told Businessweek, "The battle for [Facebook] is: Mobile’s growing fast, desktop is slowing. Is mobile’s growth enough to make up for the declines in desktop? That’s clearly the key issue."
Sure. But why isn't this an issue in the private markets?
For public companies like Facebook and Google, analysts like Richard Greenfield of BTIG Research ask: “How many mobile ads can you put into the mobile News Feed before you start to irritate users?" They recognize mobile will be big, but getting to big revenues is a delicate balancing act.
In the private markets, there doesn't seem to be the same level of concern. As I've written recently, the primary drive seems to be to generate lots of adoption, with little thought for revenue. Mobile is still Wild West enough that adoption is enough to generate outsized valuations. It's easier to make a lot of money on a company sale than it is to make lots of money through product or services sales.
And no, it's not just because 98% of investors are dumb.
Meanwhile, in the real world, companies like Google are starting to make real money in mobile. Despite concerns that Google was poorly monetizing mobile search and click-through rates were Lilliputian, last quarter Google's mobile advertising business started to hum. This despite the fees it must pay Apple for search-related ads on iOS devices (as much as 25% of Google's mobile advertising revenue), the lower click-through rates on mobile (roughly half those of desktop) and threats from app-based searches.
But maybe this simply reflects a market in so much flux that no one really knows how to value it, or even who is winning. As analyst firm IDC notes:
Marketers spent $2.8 billion in 2012 on mobile search ads, compared with $1.6 billion in 2011 and $0.7 billion in 2010. Growth rates have slowed significantly, down from 195% in 2010 to 127% in 2011 to 68% in 2012. Google still dominates the market with gross revenue of $2,166 million, and a gross market share of 79%...
Mobile ad networks are losing market share to publishers [like Facebook and Pandora], and we expect them to lose even more going forward. Networks, especially independent ones, are entering a difficult phase, in which, with an ever smaller share of revenue, they'll have to compete with publishers, which will only grow in strength.
In other words, the market is big, but it's slowing down in some areas, picking up in others, and no one really knows who is going to win.
As such, paying $1 billion for Instagram in the hope that lots of pictures will turn into lots of revenue may actually be a sane strategy. At least, it may in the face of so much uncertainty about other areas of the mobile market, particularly shifting trends in mobile advertising. In sum, perhaps valuations on mobile businesses are so incongruous because there simply isn't yet a good baseline to determine what success looks like in mobile.
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