Photo: BI Intelligence
Facebook’s public equity problem is decelerating revenue growth. A key area of potential growth left is international markets. Facebook said during its IPO roadshow that US users generated $9.51 in ad revenue per user last year, while those numbers were $4.86 for European users, $1.79 for Asian users and just $1.42 for the rest of the world, according to GigaOm (see chart at right).Depending on your opportunity, that chart either looks like lots of upside left or something gone awry. The truth is: probably both.
When internet companies mature, international revenue typically and naturally makes up a growing share of revenue as they expand their international operations and sales efforts. The same has begun to happen with Facebook. That being said, it will probably be hard for Facebook’s business to internationalize.
Here are a few reasons why and what Facebook can do about it.
- A lack of local sales forces. The virality of Facebook’s product means it grew very fast all over the world without the need for local team. As an example, Facebook had 95% penetration in Turkey before it had any staff there. While this is great for Facebook’s capital efficiency and early growth, it means that it hasn’t even begun to roll out the kind of international staffing levels and sales forces that it will need to bring those numbers up.
- Challenges to dominance. Facebook rules most of the world. But most of the big countries whence strong international growth should come are dominated by local platforms which will be hard to unseat, either for political (China, Russia) or cultural (Japan, Korea) reasons.
- The effectiveness of ads. In our experience (this Europe-based analyst has spoken to ad buyers on several continent) international ad buyers are even less enthusiastic about Facebook’s fuzzy metrics, and even more ROI-driven than American ones. In some countries such as India and Indonesia, most people will access Facebook primarily through featurephones and not websites, which will limit the effectiveness even further.
- Non-Americans are just poorer. At the end of the day, advertising spend is driven by how much the people being advertised to spend, which is driven by how much money they make, and people outside the US are poorer, on average, than people inside the US. This is true for Europe and it’s especially true of the emerging markets where most of Facebook’s user growth is now coming from. Facebook’s international ad revenue per user will always be lower than its US revenue per user.
In other words, it’s unlikely at least in the short term that much of Facebook’s needed revenue growth will come from international markets.
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