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Facebook's Future: 7 Things That Will Affect Earnings Next Year


It's time to take a look at trends and strategies for the months ahead.


When Facebook(NASDAQ:FB) released its latest quarterly earnings report on Oct. 30, investors were instantly bummed out. Then they were euphoric, and then they were all over the place, until finally they were, overall, pretty pleased. The stock hit $50.57, up .73%, in trading Thursday.

There's plenty in the numbers to be pleased about: Profit for the quarter doubled compared to the same period last year, to $621 million. Revenue was up 60%, to a bit over $2 billion, beating analysts' expectations.

The devil was in the details, which were too complicated for instant reactions.

Here's a look at seven things that will affect Facebook's future earnings, for better or worse. They were gleaned from company executives' comments following the earnings report, and from other sources.

Some point to real strategies for the months ahead. And some hint at bigger issues that are, frankly, out of Facebook's control.

1. Better Ads, Not More

Facebook walks a tightrope between pleasing its users and making money off of them.

Now, the company promises to improve the quality of the advertising in its news feed-that is, the ads placed in the center of the page, interspersed with posts from friends. But company executives said they won't increase the quantity of the advertising, now at a ratio of one paid ad in about 20 updates from friends.

Users hated them at first sight, but those embedded ads have been a real money-maker.

Which is why some investors freaked out at the ominous language used by CFO David Ebersman in a conference call in explaining the change: "This is important because increasing ads in News Feed has been a meaningful driver of our revenue growth in 2013. So this should be factored into your expectations for next year."

Holy cow, man! You said that out loud!

What he could have said was that better visual quality, and occasional use of video, could be more effective, and even justify an increase in Facebook's ad rates.

Even more importantly, the ads within the News Feed display better on those little mobile screens. But too many of them are even more annoying.

2. Mobile Is a Moneymaker

With this latest quarter's results, Facebook has answered the question about whether it can make a successful transition to the mobile world/

Mobile revenue was 49% of the total, compared to 41% a year ago. And mobile advertising revenue was way up, at $882 million compared to $153 million a year ago.

This is a key victory going forward. The only world Facebook has left to conquer is the developing world. And many new users there are skipping the PC phase altogether and going directly to mobile Internet.

3. The Coolness Factor

Investors have suspected for some time that Facebook is losing its cool. That is, the latest generation of teenagers don't find it nearly as riveting as their elder siblings did.

It's true. Facebook acknowledged that users in the younger teenage demographic do not find the site as compulsive as the same group did just a couple of years ago.

It's also confirmed in Piper Jaffray's latest report on teen trends, published earlier in October. The survey concludes that Facebook is the "most important" social site in making a purchase decision to a declining percentage of teens. Twitter (NYSE:TWTR) is on top now, followed by Facebook.

But in third place there's Instagram. Which Facebook owns, having paid $1 billion for it last year.

Instagram has 150 million users now, and it's growing. It's not all that different from Facebook, except that the picture, not the text, is the focus, giving it an immediacy and visual appeal that this audience may prefer.

Also, they probably won't bump into their moms there. Yet.

4. Graph Search Moves Forward

Soon, everyone's News Feed will be searchable by everyone else on Facebook.

It's the latest in a series of Facebook privacy policy changes to meet with intense (and, inevitably, viral) criticism.

The company has no choice. This is about making Graph Search work, and that feature is a critical next step.

Graph Search is limited to the world of Facebook posts. Users can search for answers through the entire Timeline archive of past posts.

It's no substitute for Google (NASDAQ:GOOG). But if a user wants to know where to find the best Chinese food in Chicago, or what readers are saying about a new thriller, or if anyone else goes kayaking along the Gowanus Canal, they can find out. And if they want to "friend" fellow Red Sox fans they've never actually met, they can find them, too.

If it works, this will be a whole new direction for Facebook. Now, it's a serendipitous stroll with friends. Graph Search makes it an information resource, too.

The policy change is still in the test phase. (Facebook will still allow users to limit the visibility of individual posts.)

5. Still Working on that "Second Screen" Thing

Facebook is one of many companies that yearns to be the "second screen" that people use when they want to simultaneously watch a big event on television and tap into the chatter about it online.

So far, Twitter is winning that competition, but Facebook isn't ready to give up. It has scored a deal with FOX Sports (NASDAQ:FOX) to promote Facebook conversations alongside live NFL and college football broadcasts.

And, it is looking for more partnerships with television.

6. Facebook May Buy What?

BlackBerry (NASDAQ:BBRY) executives have met with their counterparts at Facebook to see if it might be interested in making a bid for the floundering phone maker, according to the Wall Street Journal.

No word on how serious the meeting was on Facebook's side, though there is some logic here. The Facebook Phone introduced with HTC (TPE:2498) has been, so far, a dud.

It is an important concept for the company: It wants a Facebook-centric mobile device in the hands of more users, particularly those first-time users in the developing world. And the interface was designed to give a newbie the impression that "Facebook" and "Web" are interchangeable terms.

Sounds good. Except that BlackBerry's base was the business user -- the "CrackBerry" addict always in touch with the office.

Not Facebook territory, really.

7. Facebook Messenger

One more thing is coming: A completely redesigned Messenger app that is expected to be released soon in versions for Apple's (NASDAQ:AAPL) iOS and Google's Android.

This could be interesting, since Facebook has never made much of a splash in email or instant messaging.

According to the site, the app deliberately plays down the Facebook connection, presumably to avoid confusion about whether a user is chatting publicly or privately.

See also:

Facebook: Fair Disclosure or Too Much Information?

Can Motorola Revolutionize the Smartphone?

What Google Has in Store for Android 4.4

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