4 Major Facebook Growth Challenges

Comments from Marketfish CEO Dave Scott have been added to this story.

NEW YORK ( TheStreet) -- Facebook ( FB) may be gearing up for the mother of all tech IPOs, but big questions are being asked about the company's long-term growth strategy.

From Mark Zuckerberg's Harvard dorm room to a potential market cap of $104 billion, Facebook has enjoyed a meteoric rise in the space of just eight years. Experts, however, warn that the Facebook CEO faces a massive challenge ensuring that this upward trajectory continues.

"While Facebook has done a fantastic job of gathering hundreds of millions of users together between its virtual covers, monetizing that huge crowd has been more of a challenge," noted Charles King, principal analyst at research firm Pund-IT. "There may simply be no easy way for Facebook to ensure long-term growth, especially at a level commensurate with what's likely to be its huge initial valuation."

"In order for Facebook to be successful in the long-term, it must first find a revenue model that works," added Dave Scott, the CEO of analytics and reporting specialist Marketfish. "Facebook advertising, in its current form, doesn't work - let's face it, who wants to shop for a pair of pants while they are looking for the college roommate's baby pictures?"

Scott believes that the real revenue opportunity for Facebook lies in big data. "With all of the information they collect on people, they can use it to offer new services of value that would not only be welcome but needed by its community," he explained.

For the boy king Zuckerberg and his court, driving long-term revenue growth will be the biggest test of the post-IPO era. From mobile to developers and cultural challenges, analysts predict plenty for the Facebook CEO to tackle.

What do you Facebook's long-term strategy should be? Why not tell us on TheStreet's Facebook IPO live blog, which starts at 8AM ET on Friday:

Read on for more detail on the challenges that Facebook faces as a public company:

Monetize Mobile

Working out how to monetize mobile will be crucial, warns Jeff Sica, chief investment officer of Sica Wealth Management.

"To ensure long-term growth, Facebook needs to generate more revenue from mobile users who represent the largest percentage of growth," he explained, in an email to TheStreet. "In order to achieve this revenue, they must increase the time mobile users spend online to justify higher advertising fees. They must also shrink ad size for mobile users to increase the number of users."

"Facebook needs to make a full-scale effort in further monetizing not only the site's advertising revenue opportunities, but a major bang for their buck is to do the same in monetizing advertising revenues on the mobile side," added Scott Sweet, senior managing partner at IPO Boutique, also in an email. "Facebook has acknowledged that they have not been satisfactory in this area."

Facebook, which has 900 million monthly active users, said that its mobile products were used by 488 million users in March. The company, however, acknowledged in the regulatory filing for its IPO that mobile does not currently generate meaningful revenue.

Sweet adds that, with IPO money flooding in, Facebook should make boosting mobile ad revenue a top priority. The Menlo Park, Calif.-based firm, which raised its IPO price range earlier this week, expects net proceeds of $6.4 billion, assuming a price of $36, the midpoint of its projected range.

Bullish voices, however, predict that Facebook can dominate mobile. Sterne Agee analyst Arvind Bhatia, for example, recently said that Facebook could offer significant investor upside, citing rapid growth in mobile advertising, boosted by smartphones and tablets.

Key to success in this area, though, will be Facebook's ability to forge multiple deals with a host of companies. "We are devoting substantial resources to developing engaging mobile products and experiences for a wide range of platforms, including smartphones and feature phones," explained the company, in its S-1 filing. "In addition, we are working across the mobile industry with operators, hardware manufacturers, operating system providers, and developers to improve the Facebook experience on mobile devices."

Keep Advertisers Happy

" Facebook must deliver high and measurable ROI return on investment to advertisers," explained Ken Sena, an analyst at Evercore Partners, noting that Google ( GOOG) gained massive desktop success by ensuring that advertisers received a healthy ROI. "This needs to be the first step for Facebook."

"Facebook must also do a better job of identifying the demographics of its users in order to appeal to different advertisers," said Sica of Sica Wealth Management. "This could be accomplished by growing in applications associated with gaming and entertainment, which will also increase the amount of time users spend on the site."

Facebook's post-IPO cash haul could be used to fund acquisitions in this area, he added.

The fact that Facebook is dealing with slowing revenue growth makes the task of delivering advertiser ROI even more critical. The social networker saw its revenue slip 6% sequentially in the first three months of 2012, although sales were up 45% on the prior year's quarter.

Facebook's costs are also rising, according to a regulatory filing, increasing $110 million, or 66%, year over year.

Clearly, Facebook has its work cut out, according to Pund-IT's King.

"Facebook has obvious opportunities related to targeted advertising and mobile-enabled services but competition in those areas is fierce and the company's Byzantine user policies (which sometimes seem dedicated to stripping away what little privacy participants have left) have incited regulatory agency and user concerns," noted King, in an email. "Being an outlet for online services or retail sales seems to have potential, but that would probably have to be accomplished via partnerships with established players, as Facebook doesn't seem to have any ambitions to become a supplier."

King, however, notes that the Internet giant might decide to offer membership services and features which users would have to pay for. The analyst acknowledges, though, that changing customers from "freemium" into premium is easier said than done.

Forge a New Developer Strategy

"They need to take care of developers better," P.J. McNealy, founder of Digital World Research told TheStreet, citing a Facebook bias towards Zynga ( ZNGA). "We have talked to a wide range of developers and they are frustrated because they perceive that Facebook devotes its resources and its promotions to Zynga, giving little incentive for developers to engage with Facebook."

Zynga, the company behind the popular Farmville and Mafia Wars games, accounted for 12% of Facebook's revenue in 2011 and 11% of the company's sales in the first quarter of 2012.

McNealy, the author of Early Days: The Market for Social Gaming and Facebook's Potential Achilles Heel, feels that, with its reliance on Zynga, Facebook is missing a huge opportunity to tap a new pool of gaming talent.

"The upside is that you get Angry Birds or Halo or some other ground-breaking game first on your platform," he said. "To take care of developers better, that means staffing up, being responsive, and maybe not going after every last dollar from them."

Facebook, which has signed a deal with Zynga until 2015, retains up to 30% of the revenue from Zynga game sales on its platform.

Sharpen Decision Making

Tom Davenport, a professor of management and technology at Babson College, thinks that Facebook's biggest challenge is a cultural one, pointing to the company's surprise $1 billion purchase of Instagram last month.

"They need to move from a rapid and sometimes impulsive approach to decision-making (Instagram), which is probably suited to the 'gold rush days' of pre-IPO and new category development, to a more disciplined and sometimes less rapid process of deliberative decision making about opportunities, risks and executional approaches," he said. "Without becoming staid or too conservative."

Davenport, author of the book Judgement Calls, believes that technology can help sharpen Facebook's strategy.

"They need to start using best in class tools and analytics, not just for selling advertising but also managing their own decision-making about strategy over the long term," he explained, in an email.

Where do you think Facebook shares will close on their first day of trading? Why not tell us in TheStreet's Facebook IPO poll.

-- Written by James Rogers in New York.

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