Facebook's business model puzzle: How do you monetize India?

India poses a double whammy for Facebook: An immature ad market and a mostly mobile audience.
Written by Larry Dignan, Contributor

Facebook's growth, a bit of a worry given the social network's lofty valuation, will largely depend on international expansion---especially countries like India. But emerging markets provide two big challenges for the company: Nascent ad markets and mostly mobile users.

The day after Facebook's big IPO came a splat. As noted on CNET, Facebook's underwriters propped the company up on the first day. Shares never broke below $38, Facebook's IPO price. The big break, however, came Monday. Facebook shares were hammered and fell 11 percent.

As everyone debates Facebook's valuation, it's worth pondering emerging market expansion. Nearly every business sees emerging markets as the golden goose. However, monetization can be tricky. Selling technology, services and infrastructure to emerging markets is one thing. Selling Web-based advertising is another matter entirely.

In a note, research firm Trefis said that Facebook's expansion into India will be difficult. That reality is alarming when you consider India is likely to pass the U.S. in active users by 2015, according to AbsolutData. Facebook will grow in India because of its support for multiple languages.

The catch: India lacks a mature ad market and a culture that will spend on virtual transactions. Trefis wrote:

The average ad revenue generated per Indian user is much lower than their U.S. counterparts, and there is no reason to believe Facebook will be able to reverse the trend. Most Indians haven’t yet been exposed to virtual transactions, and generate much less virtual goods transaction revenue compared to Americans.

Annual advertising spending in India is just $255 million compared to $158 billion in the U.S. Additionally, we expect most of the Facebook usage growth in India to be driven primarily by the increasing smartphone and mobile internet penetration. Facebook recently admitted that it is finding it difficult to properly monetize its mobile audience, and that problem will be compounded in India, given the already low ad spending.

In other words, Facebook isn't going to be talking the BRIC (Brazil, Russia, India, China) game all that much as it transitions to being a public company.

Here's two days in the life of Facebook as a public company.

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