How Will Facebook's Paper App Affect the Business of the Social Network Titan?

How Will Facebook's Paper App Affect the Business of the Social Network Titan?

With its increasing focus on developing its mobile audience, Facebook is launching Paper, a new app that combines news reading with your own Facebook feed. Set to launch on Feb. 3, the app in many ways appears to be competition not only for newsreaders like Flipboard and Zite, but also for Facebook's own dedicated app.

In launching Paper, which will be available first on the iPhone and only in the U.S., Facebook has made a shrewd bet that offering a less closed off system will appeal to some users. The app is also a preemptive strike against both current and future competitors -- a way to be more inclusive of the world of content in general, while still keeping users firmly in the Facebook fold.

So, while it may take share from Facebook, at least those users will be staying within the Facebook ecosystem.

What does the app do?

Paper puts posts from your Facebook friends and others you follow front and center, but it also allows users to customize what appears below that feed with a variety of choices from non-Facebook sources.

As it said in its release announcing the launch, "You can customize Paper with a choice of more than a dozen other sections about various themes and topics — from photography and sports to food, science, and design. Each section includes a rich mix of content from emerging voices and well-known publications."

Facebook has not announced -- or even hinted at -- what sources will be available at launch or when it will roll out worldwide or to Android.

A lot to protect

In its 2013 year-end results, Facebook reported that it had 556 million mobile daily active users on average for December 2013, an increase of 49% from 2012. The company also has 945 million monthly active users (a number that includes daily users) for the same period, an increase of 39% year over year. To put that number in perspective, that's nearly 1 in 7 of all people living on Earth checking Facebook through a mobile device at least once a month.

That audience has also produced some huge revenue for Facebook as the company reported that mobile advertising revenue represented approximately 53% of advertising revenue for the fourth quarter of 2013, up from approximately 23% in the fourth quarter of 2012. Total ad revenue in the fourth quarter of 2013 was $2.34 billion, a 76% increase from last year -- which means the company brought in more than $1 billion in mobile revenue.

Stay big, think small

Like many innovators before it, or Apple (NASDAQ: AAPL) right now, Facebook must support a wildly popular product while fending off nimble start-ups seeking to claim the throne. The democracy of the Internet makes no giant invulnerable. And while Facebook has $11.45 billion in cash reserves, the company still remains vulnerable to the next big thing.

To hedge against that bet and retain a start-up mentality despite being one of the biggest companies in the world, Facebook created Facebook Creative Labs -- a sort of in-house start-up product development hub. The Lab's mission is to find new ways for people to use Facebook, but not necessarily in the context of the company's website or main mobile app.

"We just think that there are all these different ways that people want to share, and that compressing them all into a single blue app is not the right format of the future," CEO Mark Zuckerberg told Businessweek.

Offer something for everyone

Paper seems like a cool app that strips away some of what many people don't use on Facebook, while also allowing a broader view of the world. Whether it works depends somewhat on the quality and quantity of the outside sources, as well as the unpredictable nature of the digital audience.

But its success doesn't really matter to the overall success of Facebook as a company. What's truly brilliant about Paper (and whatever else comes out of the Creative Labs) is that Facebook has realized that making changes to its main app and site risks alienating a portion of its users. No matter what the company does, be it a mild change to the news feed or the peculiar chatheads it rolled out last year, tiny changes have a huge ripple effect on a product as big as Facebook.

New apps, however, offer a way to not only test out concepts but to create ways for people to use the parts of Facebook they like -- and only those parts. Paper is not a guaranteed success -- certainly the flop of Facebook Home shows that -- but it's part of a broader strategy.

"One theme that should be clear from our work on products like Messenger, Groups, and Instagram is that our vision for Facebook is to create a set of products that help you share any kind of content you want with any audience you want," Zuckerberg told TechCrunch Jan. 30.

And there is evidence it can work. As of Jan. 31, Facebook Messenger was the seventh most popular free app while the main Facebook app came in at 15. At the Google Play apps store, Facebook ranks second overall in popularity among free apps, but Messenger is not that far behind at number six.

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