CBR discussed the (re)emerging tech bubble earlier in the year, and yes, we have entered a new page of rampant over-evaluation of tech stocks. Why? Because none of these companies has any real idea how to make money advertising on mobile devices.
Zynga, Groupon, Facebook - all receiving ridiculous evaluations based upon two particularly insightful market impulses from greedy traders:
1) "Damn those 'new tech' companies are so hot in the marketplace right now - but... don't appear to be making any money."
2) "hmmmm... they're all strong in mobile... and damn is that marketplace so hot right now!"
If that sounds nonsensical, thats because it is. 'Mobile will work itself out' is not an investment plan. This is a slight variation of the dotcom bust, just with portable touch screens.
Facebook is struggling with mobile ad revenue - so is everyone
We are seeing the backlash from this thinking being visited out most viciously on Facebook - its IPO opened at $38. It is now trading at $21. That's a 45% collapse in under three months.
Nevermind the fact that Facebook has never really been able to justify its valuation, even including desktop based ads, and lets exclude its rather dodgy under the table sharing of information concerning mobile with a few select investors. We also won't go into the bizarre $1bn purchase of Instagram.
Facebook's quarterly report sums it up nicely - of its 995 million monthly active users (MAUs), mobile has now reached 543 million - a 67% increase on the year prior (June quarter 2011).
That means 55% of the company's overall monthly users are on mobile in some form.
"During the second quarter of 2012, the number of DAUs using personal computers was essentially flat, and declined modestly in certain key markets such as the United States and Europe, while mobile DAUs continued to increase," the SEC filing reads.
Worryingly, 102 million now access Facebook solely through mobile only. This is up 23% in just a quarter (83 million as at March 31, 2012). Facebook remains the most popular free app on smartphones.
Facebook - and the market's - painful realisation? No one knows how to make ads work on mobile yet. Its share price is starting to reflect this reality.
Why? There's quite simply not the screen real estate to follow the desktop model, which is to run ads down the right hand side of the screen, or banners at the top and bottom.
Facebook claims 49% of companies had a return on advertising spending 5x or better. It has also claimed in the past that users are up to 15 times more likely to click on a Facebook ad when compared to rivals. These key selling points are nullified in the mobile world.
It has attempted, with limited success, to produce mobile ads based around the 'sponsored link' - a spammy ugly model that for many will bring back memories of the decline of Digg. There won't be too many 'like' button pushes there.
It's not just the new kids on the block, Google is stressing too - especially since it too is an almost completely advertising based company.
Its mobile business model is based around building a smartphone eco-system (with hardware) that will allow them to slip ads into every aspect of the mobile experience. Unfortunately, they haven't figured out the screen real estate problem either.
Who wants to use Google Maps with an ad for Sportsdirect down the side of it, taking up a valuable centimetre of your 3-4inch screen? Function remains vital on mobile devices.
Apple has screwed these companies because it has created a design ethos for mobile that excludes clutter, and favours minimalism. Hardly ideal for jamming adwords, Farmville or eyebrow waxing ads down the side of apps, banners the on front pages, or as pop ups.
The app makers have gone for this model inside their apps. But Zynga, the Facebook and mobile game maker, has seen profits collapse from $18m to a net loss of $108m - this model isnt working either. Zynga also provides 14% of Facebook's total revenue.
This Apple design ethos now even ruins tablet advertising, where the larger screen real estate can't be utilised without revulsion from users. Consumers have quite simply gotten used to not having ads shoved in their faces.
Even former darling Groupon, which moved from email spamming offers to mobile apps, has yet to turn a profit.
But this market pattern we have all seen before - a replication of behavior occuring a tech generation ago.
In the early days of the 21 century we settled for pop up ads, dummy page ads and every other kind of intrusive Flash or Java-based advertising ploy available until Google invented proper targeted advertising with Adwords. It killed off the opposition pretty quickly.
The adoption of high speed 4G networks will only make the transition from desktop to mobile more pronounced.
No one seems to want to admit that we may be in that next phase in tech history, where, post bust, a new company steps in, disrupts the whole market with an unforeseen approach and leaves the laggards drooling in the corner. Investors desperately want to believe that these companies know what they're doing, that a solution is imminent.
This is perhaps why the daft rumours concerning Facebook phones never die - even after CEO Zuckerberg has said its not happening.
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