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Facebook Inc's International Expansion Must Overcome These Key Obstacles

By Andrew Tonner – Aug 18, 2015 at 10:36AM

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As Facebook relies on emerging markets to power its growth in coming years, the social media giant's recent efforts in this key market help signal Facebook can indeed navigate this tricky transition.

Source: Facebook.

For social media giant Facebook (META -0.54%), lofty expectations are business as usual. The company that redefined how people interact with their friends, acquaintances, and colleagues, both near and far, has blossomed into one of the largest publicly traded technology companies in the world, producing market-beating returns for its investors in the process.

However, as it progresses deeper into its second decade of existence, Facebook increasingly will need to find creative ways to overcome a new crop of problems befitting a growth company of its enormity.

Emerging markets are the key
As so often happens, technology companies, especially ad-based Internet companies like Facebook, launch their products in a given geography, grow their user base, and then eventually monetize it. Facebook followed this strategy to great results the world over -- surpassing 1 billion users before it was a decade old.

However, with emerging markets increasingly driving user growth for Facebook, it faces new challenges in continuing to monetize users in these high-growth markets, especially in the Asia Pacific region, and India, in particular. Take a look at the massive skew in the economics of a few of Facebook's key regions.


U.S. & Canada

Facebook Avg.

Asia Pacific

Facebook Average Revenue Per User 2014




Source: Facebook SEC Filings. 

In surveying the above chart, a number of key points become apparent. For starters, the U.S. and Canada certainly contribute a disproportionate amount to Facebook's financial performance versus other countries. More specifically, the U.S. and Canada comprised, on average, only 15% of Facebook's total monthly active users, or MAUs, in 2014, but generated, on average, 46% of Facebook's revenue during the same period. 

This makes perfect sense, as developed regions like the U.S. and Europe enjoy far more advanced digital advertising ecosystems than those found in many emerging economies. However, with developed regions like the U.S. far closer to their potential user growth ceilings, the implication becomes that Facebook needs to find ways to increase its monetization efforts in emerging markets. This is by no means lost on Facebook's management, and as you'll see below, Facebook's efforts in India hold important lessons and risks for Facebook investors.

India as an example
For those unaware, India carries particular importance for Facebook's emerging market monetization strategy for a few key reasons. Most importantly, 132 million users make it Facebook's second-largest individual market behind the United States' 193 million.

Furthermore, India also enjoys a relatively developed online advertising space that Facebook has yet to tap into. According to research cited by Reuters, Facebook earns about $15 million in revenue from India each quarter.

Not operating in a bubble, Facebook has already taken steps to further leverage its huge Indian user base. This February, Facebook launched its initiative in India to help expand access to the Web -- and Facebook itself by extension.

Facebook also created Facebook Lite, a stripped-down version of its service that consumes less data, an important consideration because more than 90% of Facebook users in India access the social networking platform via their mobile phones. Facebook also launched a series of tools, including free email support for advertisers, in hopes of attracting more commercial interest to the platform.

Despite setting the stage to make considerable progress in India with these recent moves, Facebook faces a number of critical hurdles that could keep it from bolstering its emerging market business. For starters, Internet penetration in India, like in many other emerging markets, remains woefully diminutive. According to reports, only an estimated 252 million of India's roughly 1.3 billion citizens enjoy access to the Internet. Facebook's efforts should help expand access, but certainly significant strides must be made in order to bring India's Internet access closer to the levels of developed markets.

Without question, the challenges facing Facebook to bring its service mainstream in emerging markets like India are massive, but so is the potential. Therefore, Facebook needs to continue to attack challenges like those it faces in India in the years to come in order to realized the lofty expectations baked into its stock price today.

Andrew Tonner has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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