Facebook Gets Religion for Revenue

Geoffrey A. Fowler and Shayndi Raice

Mark Zuckerberg for years studiously has avoided revenue-making opportunities that might compromise the experience of using the Facebook site.

But as investors take a hard look at the potential challenges to Facebook Inc.'s (FB) largely ad-driven business, the founder and chief executive of the social-networking site suddenly seems in the mood to experiment.

Since filing for an initial public offering in February, Facebook has floated potential moneymakers, such as a paid app store, ads on mobile phones and coupons for local businesses.

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The latest revenue spaghetti test came last week, when Facebook began charging users in New Zealand as much as two New Zealand dollars ($1.53) a post to ensure that their own friends see what they write. The service, dubbed Highlight, comes close to flouting Facebook's long-standing pledge, emblazoned on its home page, that the site is "free and always will be." The service is similar to one for marketers, called Reach Generator, which Facebook introduced in February, for brands to pay per "fan" to reach those users 75% of the time with marketing messages.

Some users are puzzled by Facebook's fee to make posts show up more often. Amy Rutherford, a 32-year-old from Wellington, posts photos and messages on Facebook throughout the day, but said she wasn't keen on paying to make sure her 250 online friends didn't miss her quirky updates. "I just don't know if anything I would be saying would be important enough to make me want to pay NZ$2 for it," she said.

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A Facebook spokesman said the Menlo Park, Calif., company constantly tries new features. "This particular test is simply to gauge people's interest in this method of sharing with their friends," he said, declining to say how the experiment was going.

Even among Silicon Valley companies, Facebook has a reputation of fast and furious product introductions that don't always stick. It abandoned a major 2007 initiative called Beacon that sent data from external websites to Facebook, and a 2011 effort at selling daily deals, like Groupon Inc. (GRPN).

But investors will look for Facebook to cook up new streams of revenue that indicate a future beyond its current style of advertising. Last year, advertising represented 85% of Facebook's revenue of $3.7 billion. At its IPO, Facebook will likely be valued at about 100 times its current profit, meaning it must fuel growth by figuring out how to squeeze a lot more value out of its 900 million users.

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Facebook is sending a message that it might follow a "freemium" model, said Jed Williams, an analyst with BIA Kelsey. The idea, also used by sites such as LinkedIn Corp. (LNKD), is that the company lures users in by offering its basic product free but gets users to pay for additional features.

Beyond Highlight, a number of recent initiatives suggest a future for Facebook, in which the company might earn more money directly from users.

Facebook recently said that in coming weeks it would introduce App Center, an online store for users on computers and mobile devices to purchase apps.

Like Apple Inc.'s (AAPL) iTunes App Store for the iPhone, Facebook apps will be vetted by the company, include ratings and in some cases carry a price tag. While Facebook has had apps for years, and takes a 30% cut on purchases that users make playing games inside of them, the idea of the social network selling software for a flat fee is new territory.

Also last week, Facebook quietly stepped into the booming new industry of online storage, with competitors ranging from Apple and Google Inc. (GOOG) to start-ups such as Dropbox Inc. Facebook said nothing about charging for the service, which allows users of its Groups feature to share documents, but most of its mature competitors offer a basic service free and charge users a premium for additional storage.

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"Their goal, which I don't think they will ever pull off, is that they don't want you to ever leave Facebook," said Wedbush analyst Michael Pachter, who has an "outperform" rating on Facebook and a $44 target stock price. (Facebook's current price range for its IPO is $34 to $38 a share.) "They could absolutely replicate anybody's business model because they have the customers."

The experimentation has extended to Facebook's ad business, too. In recent months, Facebook has stretched the number and placement of ads on its website, stacking them up to seven high on the right side of users' home pages. In March, it introduced a new stab at the daily-deals business, dubbed Offers, which allows local businesses to send freebies and promotions to users.

Facebook said its IPO prospectus that a lack of mobile advertising was a risk factor, and in March began experimenting with how such ads might work. The company now offers paid messages that appear amid content from users' friends on cellphone screens. In recent filings, Facebook said it still wasn't receiving significant revenue from mobile ads.

Some investors who have been clamoring to see Facebook figure out ways to diversify its revenue said they have taken note of the experiments. Kevin Landis of the San Jose, Calif., tech investment fund Firsthand Capital Management Inc.—which bought Facebook shares on the secondary market—said he "would be concerned if Facebook weren't doing a lot of these little experiments."

Many could be flops, Mr. Landis said, but they show the potential for Facebook to grow into a $100 billion company. "Critics don't give the company credit for things they haven't announced," he said. " 'No, Einstein, we have thought about it.' "

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There are many more possible revenue drivers that analysts have floated for years about which Facebook has remained mum, including making its own phone, offering a search engine and running an advertising network to target ads to Facebook users on other sites.

It was unclear what had been behind Facebook's recent flurry of launches, and whether it was designed to send a message. In the process of pitching his IPO to investors, Mr. Zuckerberg studiously avoided discussing revenue. In a roadshow video made public last week, the 28-year-old spent a significant amount of time explaining Facebook's products, but left descriptions of its advertising and payments business to Chief Operating Officer Sheryl Sandberg and Chief Financial Officer David Ebersman.

Such efforts could allay some potential investors' concern about future revenue, but carry the risk of alienating Facebook users as the site becomes increasingly commercial.

"It goes back to the question, 'Has Facebook gotten too big for its own good?' " said Deborah Aho Williamson, an analyst at eMarketer. "So far, I don't really see much change in how people use Facebook."

—Lucy Craymer contributed to this article.

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