Facebook (FB +0.30%) finished last quarter with 1.55 billion monthly active users (MAUs), a solid 14% increase from a year ago. But as Facebook's growth slows down in mature markets like the United States, the company is aggressively expanding into higher growth countries like India.
Facebook CEO Mark Zuckerberg meets Indian Prime Minister Narendra Modi. Source: Facebook.
Back in June, Facebook reported that it had 125 million MAUs in India, up from 112 million in January. Research firm eMarketer expects that figure to hit 211.2 million by 2018. By 2017, the firm thinks Facebook's mobile user base in India will reach 145.9 million, surpassing 138.8 million mobile users in the U.S. and becoming the company's biggest market.
But as Facebook expands deeper into India, it's running into three big issues that will likely require the company to shift strategies.
Censorship
The Indian government is clearly concerned about the growth of Facebook. In the first six months of 2015, its requests to remove Facebook posts jumped three-fold from the previous year. According to Facebook, India ranked first in censorship out of 92 countriesk, with 15,155 requests for content removal.
The Indian government has blocked access to other websites in the past. Back in January, it blocked 32 websites, including Vimeo, Dailymotion, and Github, to check for ISIS propaganda, and filtered 857 pornographic websites in August. Access to those sites was subsequently restored. As for its censored posts, Facebook says that it complied with government requests because the posts were filled with "anti-religious and hate speech that could cause unrest and disharmony within India."
Free speech advocates might criticize Facebook's move, but Facebook is clearly trying to avoid being banned in India, as it was in China in 2009 after Xinjiang independence activists used the site as a communications tool.
Net neutrality
80% of India's 1.25 billion people still aren't online. To bring more Indians online, Facebook introduced Free Basics (previously known as Internet.org), a partnership with several companies that "zero-rates" certain apps like Facebook. Data consumed through zero-rated apps, which are introduced through carrier partnerships, don't count toward monthly data plans.
Facebook promotes Free Basics as an altruistic effort to bring the Internet to low-income and remote areas, but critics claim that it violates the principles of net neutrality by giving zero-rated apps an unfair advantage over non-zero-rated apps. Those criticisms forced Alphabet's (GOOG +2.23%) (GOOGL +2.28%) Google to suspend its own zero-rating plans in May.
Facebook has also been testing a solar-powered drone to deliver Internet access to remote areas. Google is doing the same with its Project Loon high-altitude balloons. Facebook hasn't launched those drones in India yet, but Google plans to test its Internet balloons in India in the near future. If Facebook and Google combine zero-rated apps with those ambitious projects, they'll likely attract similar criticisms regarding net neutrality.
Facebook's solar-powered drone. Source: Facebook.
Ad sales
India is currently Facebook's second largest market, but it generates very little ad revenue compared to other countries. Over 80% of Facebook's mobile users in India still use 2G connections, which makes it tough to load Facebook's mobile app or play pricier video ads. That's why Facebook launched Facebook Lite, a lightweight version of its full app, for 2G users earlier this year. High resolution pictures are scaled down, support for video is removed, and it doesn't have a built-in browser.
Facebook doesn't disclose how much sales it generates in India, but Counterpoint Research analyst Neil Shah estimates that Indian users only contribute about $15 million in revenue per quarter. The firm believes that Google generates about $350 million in ad revenues per quarter in India.
Assuming that eMarketer's forecast for 136 million Indian Facebook users by the end of 2015 is correct, India accounts for 9% of Facebook's user base but generates just 0.3% of its quarterly revenues. But for now, expanding in India isn't really about generating revenue -- it's about maximizing its user base to set up the foundations for future growth.
The next big market
Investors in Facebook, Google, and other web-based companies should keep a close eye on the Indian market. As the Chinese market matures, many companies are scrambling to expand their ecosystems to India. Companies that plant their seeds early, like Facebook and Google, will likely profit several years later after Internet usage rises and connection speeds improve.
