(MoneyWatch) Facebook (FB) has a little problem that it shares with many would-be giants of mobile computing: How do you make money?
That challenge -- and the fundamental questions it raises about the social network's future as a business -- is at the heart of the company's botched IPO and the reason it has lost more than 45 percent of its market capitalization since the May 18 offering.
So it's no surprise that Facebook has decided to do something about it and introduce mobile-only advertising -- what the company calls "sponsored" stories -- reports Jim Edwards at Business Insider. It adds potential revenue in the area that Facebook needs it most. The obvious question is whether that approach will succeed, because there is a big, and two-part, strike against mobile ads.
The first problem is real estate. Advertising has depended on sharing space with the entertainment and information content of media. The sharing could be spatial, as with the ads that appear next to content in print or on websites, or temporal, as with ads running on TV or such video sites as YouTube or Hulu. But the content draws the audience and advertisers tag along, hoping to catch the attention of consumers.
With the growing demand for iPads and other tablet computers, the bulk of mobile ad opportunities are on smartphones and their relatively small screens. That's what has stymied Facebook, along with other publishers and social companies. On a phone, there's just enough room to show people what they want to look at. Put something on the margins of that screen and you have to force everything to be small to fit it in, at which point people just enlarge the screen and focus on what caught their interest in the first place.
To make ads work you have to stick them in the middle of the screen where people can see them. That's the second problem. Consumers have come to expect services they want, like Facebook, but have also been trained to think they shouldn't pay. Marketers worry that if they do interrupt the flow, the ads will get a negative reaction and do the opposite of what companies want.
That's why Facebook is taking a big chance -- but maybe the only one -- by introducing sponsored stories into mobile content, where companies pay to highlight posts. That's going to be tough because Facebook's approach to making money has been to increase the number of ads on the sides of pages seen on browsers. How do you balance making revenue with avoiding so many interruptions that people tune out?
Twitter seems to have found an approach, according to recent statements by CEO Dick Costolo. He noted a case a few weeks ago when mobile ad revenue topped non-mobile in a day through promoted tweets, in which an advertiser pays to put a message in some group's news stream.
The unanswered question is how people will react over time. Even if revenue goes up, it only shows that advertisers think they're getting what they want. Longer term measurement will tell whether they actually are. As a result, an advertising medium mobile still has to prove that it has the commercial promise that so many assumed it would have.