Why Facebook Needs To Grow The Internet

Facebook's recent earnings results were a blowout, but the growth rate of its daily active users is dropping. That's why its plan to bring the internet to the developing world is as much about its business as it is about philanthropy.

Facebook CEO Mark Zuckerberg's plan to expand the internet to the developing world is just as important for Facebook's health as a business as it is a philanthropic effort — and yesterday's earnings report makes that clearer than ever.

The company's reported second-quarter earnings were, for all intents and purposes, a complete blowout. The social network's advertising revenue grew 67%, with 62% of that coming from its mobile advertising products, prompting investors to send its stock to an all-time high when it began trading this morning. But behind the strong numbers is a slight downward trend that Zuckerberg needs to address. Facebook's user growth, which has now picked up a nontrivial percentage of the entire planet's population, has started to slow, albeit very slightly.

This is quite normal for any online service. After all, there is a hard cap for the number of potential users the social network can accrue (the planet's 7 billion humans, minus outliers for those who aren't able to use Facebook because they are too young). Of course, Facebook's soft cap today is well below the entire addressable universe, limited to the number of people who are physically able to connect to the internet.

As part of Facebook's most recent earnings report, the company said it had 829 million people checking Facebook every day, which is up 19% from the same quarter a year ago. During that quarter in 2013, Facebook said 699 million people checked Facebook every day, which was up 27% from the year prior when it had 552 million people checking every day. Similar comparisons for its other quarters, along with the same comparisons for people who check Facebook at least once a month, show a very slight but present drop in its annual growth rate, meaning that while the overall raw number is still increasing, the pace of the gain is slowing.

Facebook's user growth is still, by every possible metric, extremely impressive. That said, its user growth is not as fast as it once was — and that's something Facebook, which has massive scale and broad appeal, will try to fix beyond simply tweaking its products. The company has made it clear that this is one of its goals, as "connecting everyone" is one of its core tenets. It also underscores the importance of its efforts like internet.org — a partnership between Facebook and other companies — that can have implications beyond simply connecting new people to the internet.

The user growth is certain to nag at Zuckerberg, who still has public shareholders to answer to and a company valuation to grow. There are a number of ways Facebook can still grow both its users and valuation — though the latter is pretty impressive, surpassing GM and Disney in market capitalization as a result of today's share price gains. One option is to build and acquire better products, which will encourage its users to check Facebook's services more often, in turn making it possible for Facebook to sell ads at a higher price. It can also improve its advertising targeting and create new advertising products, making its users more valuable, which can also increase how much it charges for ads.

Both of these already have tremendous upside, as evidenced by growth in the company's ad business in the past few quarters. Facebook is still chipping away at the advertising budgets that have been traditionally reserved for television and other mediums. But when nearly a fifth of the world's population is checking Facebook once a month, growing the user base — another way of increasing the company's value — becomes a far more complex problem. One way to ensure that there's a healthy pool of new potential users is to cast a wider net, which for Facebook means assisting in bringing the internet to the far reaches of the connected world.

"Already, our initial partnerships in the Philippines, Paraguay, and Tanzania have helped around 3 million people connect to the internet who had no access before," Zuckerberg said on Facebook's earnings call yesterday. "We're really proud of these early results."

The company also quietly acquired Pryte last month, a service that allows users without data plans to access online services by selling short-term passes.

On the company's earnings call yesterday, Chief Operating Officer Sheryl Sandberg said Facebook ran its first feature phone-only campaign in Asia with Gilette, and that it was successful in reaching 60% of its target audience and "generated significant lift in both message and ad recall."

Of course, Facebook, isn't the only company trying to expand the internet to the less-developed regions of the world. Google has its own initiative called Project Loon, in which it is trying to beam the internet to less-developed regions using floating balloons. Like Facebook, Google's current business scales with the number of people using the internet and, as a result of that, seeing the ads it provides.

There's little dispute that connecting the entire planet to the Internet and facilitating communication for all is an admirable goal for a social network. But for Facebook it has plenty of business implications to go along with simply connecting people to the internet who have never had regular access to it.

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