The Massive Opportunity Right in Front of Facebook
Facebook (NASDAQ: FB) is a global phenomenon. Even with 1.86 billion monthly active users as of the end of 2016, the company is still growing its user base at a fairly steady clip in the high teens.
Most of Facebook's user growth these days comes from emerging markets -- its Asia-Pacific and Rest of World regions. Those markets accounted for 88% of net new users added to the platform last quarter. At the same time, those users aren't nearly as engaged with the social network as their North American and European counterparts. That represents a massive opportunity for Facebook to improve the value of the users it already has.
Image source: Facebook
A look at engagement rates
The simplest measure of engagement on Facebook is what percentage of monthly users log on to Facebook daily. Overall, 66% of users visit Facebook's website or open its app on a daily basis. The daily active user-to-monthly active user (DAU-to-MAU) ratio breaks down by region like so:
Data source: Facebook's fourth-quarter earnings slides.
Users log in much more often in the U.S., Canada, and Europe. While there are probably pockets of higher engagement in the Asia-Pacific and Rest of World regions, overall they lag well behind.
There are several reasons for this disparity, but perhaps the biggest is that developed markets have better internet infrastructure than emerging markets. That difference allows them to constantly check Facebook from wherever they are. While many Facebook users in emerging markets use a mobile device as their primary computer, many still don't have access to a strong internet connection all the time.
The growth of mobile in the U.S. was a huge driver of increased engagement on Facebook. From the end of 2009 to the end of 2013, smartphone penetration in the U.S. nearly quadrupled, from 17% to 65%. During the same period, Facebook's DAU-to-MAU ratio improved from 57% to 73%. Europe saw a nearly identical improvement, except it lagged by one year.
Facebook could be in for a similar improvement in emerging markets over the next few years, and Facebook is actively working to pull that daily engagement forward.
What Facebook is working on
Facebook's efforts with Internet.org have been well documented. Internet.org's goal is to provide internet access to people in underserved markets for free. Facebook partners with wireless carriers all over the world to offer access to basic internet services through its free basics app. It's also working on ways to beam down internet access from solar-powered drones and satellites. Additionally, it's partnering with local businesses to help them share excess internet bandwidth with the public.
Facebook still faces the challenge that wireless internet connections in emerging markets remain relatively slow. To overcome the challenge, Facebook released Facebook Lite, a lightweight version of the Facebook app that uses less data than its full-featured counterpart. Earlier this year, Facebook Lite surpassed 200 million users.
Facebook is doing everything it can to ensure that its users in emerging markets can access Facebook whenever and however they want. As the technology improves and users get access to faster internet speeds, we should see the DAU/MAU ratio continue to climb in those regions.
Growing average revenue per user
Increasing engagement is one of the easiest ways for Facebook to improve its average revenue per user (ARPU) in emerging markets. ARPU in the Asia-Pacific and Rest of World regions sits well below that of Europe and the U.S. and Canada for several reasons, but Facebook can't exercise its influence over all of them. Growing engagement is something it can control, at least to some extent.
ARPU growth rates in emerging markets have been slower the past few years compared with developed markets. That's because Facebook is most focused on bringing more users on board. As that focus shifts to improving engagement and growing daily users, ARPU growth should accelerate, providing another path for strong revenue growth from Facebook.
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Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.