The Mobile Tipping Point And Why Yahoo Must Mimic Groupon And Facebook

When Facebook announced in its second-quarter earnings report that 41 percent of its advertising revenue was generated by mobile usage, it was a watershed moment: The social company proved that it could monetize its increasingly on-the-go user base.

Key to the 41 percent figure is that it was up 11 percent as a percentage of total revenue in a single quarter; the first quarter's mobile share percentage was a now-modest 30 percent. The figure is important for Facebook as it indicates that as smartphones and tablets take increasing stature over the desktop Internet, Facebook as a business won't be left behind.

That shift threw Zynga into a downward spiral, for example. I ran the math and, given past average growth rates, Facebook could generate more advertising income on mobile than desktop inside of 2013. But growth could, of course, slow.

There is a shift worth noting that is emerging in technology companies — born in the age of the desktop web — that are working to harness mobile usage to generate revenue: Reaching the tipping point of bringing in half their top line or more in mobile-derived incomes.

To say that you are a "mobile-first" company is all well and good, but you become one when your dollar flow is more mobile than not.

Facebook, presuming another banner quarter, could cross that line soon in terms of its advertising revenues, but let's not split hairs. Who else is edging close? Two firms that are form something of a cadre with Facebook: Groupon and Yelp.

Facebook went public in mid 2012, Yelp in early 2012, and Groupon in late 2011. The companies are essentially IPO siblings. That fact gives us journalistic license to write a trend piece. You are welcome.

Mobile Dollars

Facebook brings in 41 percent of its ad dollars from mobile users. Yelp generates 40 percent of its advertising revenue from mobile usage. Groupon, it was revealed during a recent earnings call, derives almost half of its revenue from mobile usage.

The Groupon number is the largest, and the broadest, encompassing all revenue, not merely advertising top line, making it the most interesting. As a public company, Groupon has been on a tear in the past few months. Since it fired its founder and CEO Andrew Mason, its stock has risen some 130 percent. Since March.

Some of that increase is certainly due to the executive shakeup, but its second-quarter earnings contain a separate narrative. Allow me a short self quote for the sake of brevity:

Groupon today reported the appointment of Eric Lefkofsky as its CEO, Ted Leonsis as the Chairman of its board, revenue of $609 million in the second quarter, operating income of $59 million excluding stock compensation expenses, and non-GAAP earnings per share of $0.02.

So, sans a few items, Groupon managed to eke out a per-share profit of a few pennies, and operating income worth around 10 percent of its total revenue, again in a non-GAAP sense. What's interesting is how those numbers came about. Yes, Groupon generated half of that revenue from mobile usage (smartphones, essentially), but what does that mean for other Groupon revenue sources? MediaPost has this nugget: "Direct email is now responsible for less than 40 percent of transactions in North America, the company says."

Direct email incomes are in decline — presumably revenue from direct email is correlated to transaction volume, which is heading down — and revenue is all but flat year over year? What plugs the hole? Mobile income, naturally.

So, Groupon's modest earnings beat is constructed firmly on the back of its growing mobile revenue. The same is true for Facebook, as you already know:

Facebook's mobile revenue grew by a quarter billion dollars in the second quarter. Not bad, given that as a percentage gain it works out to around 75 percent. And, perhaps more importantly, the $282 million figure is more than four times our previous $69 million sum [Note: That is the dollar figure for Facebook's desktop advertising revenue growth during the second quarter]. Therefore, mobile ad revenues on a dollar basis grew four times as fast as desktop advertising incomes in the most recent quarter.

These companies are finding material revenue support from mobile usage, as the desktop side of their business either slows, or in fact shrinks. Facebook, like Groupon, has been rewarded by investors with a buoyant stock.

I'd posit that for modern Internet companies, the percentage of their total revenue that comes from mobile usage, and the rate by which that figure increases, are the two most important financial indicators that you can report (apart from profits and the like). They are not, in my view, to be dismissed as vanity metrics.

And that brings us to Yahoo.

Mobile First, And The Yahoo Question

Yahoo has very publicly plotted a course towards mobile. It is aggressively buying small firms comprised of mobile engineers, closeting their products, and plugging that talent into its own organization. Talent acquisition through corporate war. And it's working, in case you hadn't noticed.

The company is coy, however, about how much money it brings in from mobile advertising; that revenue is the result of its mobile focus. Yahoo did not provide that metric in its most recent quarterly report, and declined to disclose it to TechCrunch via email.

The question is a fun one: Like Facebook, Groupon, and other companies, is Yahoo seeing large new doses of income from its mobile efforts? As I wrote recently, if Yahoo's talent spree doesn't drive revenue growth, the company is perhaps deploying funds that could be returned to shareholders, in one fashion or another, in perhaps not the most effective fashion.

There's a rule about financial metrics: If a company doesn't disclose a figure, it's because they either don't want their competitors to know how big that number is, or they don't want the press to know how small it is. In this case, I doubt the former is at play. That leaves the latter.

I'm not picking on Yahoo. Instead, the company has enjoyed a simple fawning treatment in the media in its last year — more than partially deserved, I'd say — that should be tested and pushed back against at least lightly.

Yahoo has managed to greatly expand its mobile usage. That is plain. The company, proud of those figures, trumpeted them: 340 million active mobile users at the end of the most recent quarter, 300 million the quarter before, and 200 million monthly mobile actives at the end of calendar 2012.

So, that's 70 percent growth in a half year. Impressive. That said, either Yahoo mobile usage isn't monetizing incredibly fast, or it is not growing quickly enough to plug declining desktop advertising revenue.

As part of its "Global Display" revenue, Yahoo counts mobile income. Or, as the company phrases it: "Display metrics include data for graphical and sponsorship units on Yahoo! Properties (including mobile)." That figure was down 2 percent in the most recent quarter, and has declined in each of the past eight quarters. However, there is a possibly green lining to those two facts: Advertising revenue decline is in decline itself. So the amount of money that Yahoo generates less per quarter is going down. It has all but stabilized.

If that is true, and Yahoo's now much larger mobile userbase hasn't contributed, or not much, that's a shame. But I don't think that is the case. I suspect that Yahoo's mobile strategy has in fact helped staunch declining advertising revenue. But not enough to shout about, it would seem, given the company's reticence.

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It's interesting to watch companies older than say three or four years tack mobile. It's not a simple maneuver, as Yahoo is demonstrating. However, to avoid pulling a Zynga, it isn't much of an option, expect perhaps for companies that service enterprise activity that is inherently non-mobile. And that is a shrinking bucket.

All told, Facebook, Groupon, and Yelp are blazing a trail for Yahoo. The question is now whether what Yahoo is (no, we're not getting into that now) can be translated as well as those other firms into the language of mobile. That's Mayer's bet. We'll know in a few quarters in which direction things are moving.

Top Image Credit: Scott Schiller