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Austin Smith: OK. Now, moving on to Facebook, the most-hyped IPO -- probably ever. Also one of the most disappointing, but we've seen a bit of a rebound in the stock that has people interested again. What should we be watching with this company in 2013?
Eric Bleeker: The key area is mobile, of course. You saw it going from essentially zero -- zero! -- to $150 million. Great growth. I will take that in any industry in one single quarter.
But a second, and really underloved, storyline of all this is -- they beat analysts' expectations in the past quarter, and that's part of why they soared -- but if your mobile's grown from zero to $150 million, and you're beating the analysts' expectations by about $30 million on the revenue line, well that shows a high level of desktop cannibalization, and that's where most of their revenue comes from.
How much can they balance that revenue growth in mobile, with not falling too far behind in the desktop? That's a huge area to watch. You can't watch mobile completely in isolation because it affects the whole company.
We've seen other companies like Baidu, which is actually a search engine company in China, and that's getting beaten down because as much as it is starting to see growth rates in mobile, it's really offset by declines and coming weakness in desktop, from that mobile growth.
Austin: Anecdotally, it's easy to get big gains, obviously, when you're building off a small base. In mobile, you do things like get aggressive and put ads in the feeds, but people instantly become conditioned to those things.
Much the same way with Google, you're almost conditioned to not click those top three sponsored ads at this point. The problem with Facebook is they can get this big growth in mobile at the risk of cannibalizing their desktop search, but it's the type of growth that may not be sustainable because people instantly become conditioned to avoid it.
Eric: Yup. I agree 100%. There's actually a term for this, "banner blindness." When you get that pop-up, you close it. When you've got that banner on the side, we've been conditioned not to look at ads.
If you extrapolate any new advertising form forward, you're going to be disappointed because consumers will begin to ignore it. That leads into my final area to watch with Facebook: you have to make display better. People talk about "gift giving" and all these other little trends...
Austin: Give me a break.
Eric: I know. What you're really looking at, can they do something interesting with retargeting? Can they do something interesting with display advertising?
Their mobile effort was so successful because they did something interesting. They went in the [content] stream. They're going to see a huge pop-off, and they're going to see some regression. They need to continue doing interesting things with their display network, because that's still where most of the revenue growth is.
If you're a Facebook investor, yeah, mobile's exciting but you need to balance it with total display. For me, that's going to show, can they continue these growth rates going forward? If they can continue growing, I think investors will continue paying up at higher multiples for these shares.
Austin: No doubt that they have a lot of potential. The execution is what worries me, so definitely some important things to watch.