Mark Zuckerberg spent Facebook Inc.'s early years trying to keep it cool. But the founder and CEO of the social-networking giant has spent the last 18 months methodically preparing Facebook to look and act more like a blue-chip business.
Mr. Zuckerberg in a recent interview said.
"There was a period in Microsoft's evolution where they said, we want to put a computer on everyone's desk. That's the way that I want to run Facebook...We want to be operating in a way that we're working towards this longer vision of where we think the world should be."
Facebook plans to file early next year with the Securities and Exchange Commission to take the stock public in the second quarter of 2012, according to a person familiar with the matter. The IPO could raise as much as $10 billion at a valuation of more than $100 billion.
The poor IPO debuts this year of Internet companies Groupon Inc. and Zynga Inc. has put new scrutiny on Facebook. Groupon shares are down 12% from their first-day's close, while Zynga fell below its IPO price within minutes.
As Facebook's IPO gets closer, Mark Zuckerberg is trying to position the company as a seasoned business. Photo: Reuters.
As hard as it is to reach a public offering, it is even more difficult for young businesses to play head-to-head against tech stalwarts such as Apple Inc. and Microsoft Corp. But interviews with Mr. Zuckerberg and others inside Facebook reveal the eight-year-old company is trying to emulate the influence, staying power, and meticulousness of the biggest technology companies.
Since last year, Facebook executives have been crafting dummy scripts for quarterly earnings calls, addressing imaginary questions from analysts about the company's revenue and profit, people familiar with the matter say. They have even written a top-secret draft of an IPO prospectus, a role traditionally left to bankers.
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The company's chief financial officer, David Ebersman, has been professionally auditing Facebook's financial statements each quarter, say people familiar with the matter, and avoiding the accounting approaches that raised questions for Groupon and Zynga.
Although Mr. Ebersman has played tough with Wall Street bankers, telling them he's skeptical about what they can contribute to an IPO, he's also communicated his interest in moving forward with a standard public offering, people familiar with the matter said. Facebook has little interest in taking a page from Google Inc.'s book, which did an electronic auction-style offering.
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Even the CEO's trademark Adidas flip-flops are growing up. Mr. Zuckerberg, 27, has upgraded to Brooks running shoes and went so far as to wear a dark blue tie and sports coat when President Obama visited in April—a sartorial move he was once loathe to take for the many bankers, lawyers and CEOs he meets.
The company has both scale and a strong brand, says Lise Buyer, a Silicon Valley-based IPO consultant. But the big question, says Ms. Buyer, will be Facebook's ability to operate profitability through ups and downs.
One remarkable thing is just how few employees are needed to create the company's $4 billion in revenues. Facebook employs 3,000, a number dwarfed by Microsoft's 90,000 and Google's 31,000.
Ms Buyer says.
"The missing piece that we haven't seen yet is reliability. The blue chip stocks are the ones that people talk about belonging in widows and orphans funds. Historically, technology IPOs don't make that list. Because of its scale, Facebook could be different."
Questions Linger on Madison Avenue
The company still has a ways to go to convince Madison Avenue advertisers. Even today, most of Facebook's ads are for small advertisers, according to data firm comScore Inc. Facebook has yet to prove that it can increase its advertising on such a scale to snag the big brand names who drive billions of dollars to TV, radio and print campaigns.
Facebook is also still plagued by doubts about its commitment to users' privacy, an issue that had dogged it since its earliest days. Despite a landmark settlement with the Federal Trade Commission in which the company agreed to privacy audits for 20 years, questions remain over how it manages the trove of private data it owns.
Facebook's rapid growth—it now has 800 million members—had Wall Street anticipating an IPO more than two years ago. But Mr. Zuckerberg, known for his product vision but impatience with finance, has been reluctant to go public.
People familiar with Mr. Zuckerberg's thinking say he worried about the damage an IPO could do to the company's culture and wants employees focused on making great products, not the stock price, they say.
And if it were up to Mr. Zuckerberg, Facebook would remain private. But a federal rule which forces financial disclosure once a company has more than 500 shareholders ultimately convinced him it was the right step.
Mr. Zuckerberg says he can head off the ill effects of an IPO by assembling a management team tough enough to resist shareholders' short-term desires. Mr. Zuckerberg said, referring to IPOs,
"People always talk about the downsides of these things, and I do think they're real, but the management of the company fundamentally has control over the decisions it makes."
Building a Broader Management Team
Structuring a strong executive team has been Mr. Zuckerberg's most complex challenge, he said.
"It was not something I had any experience doing when we were scaling up from a company of 50 people to 100 people to where we are now."
Mr. Zuckerberg has been drawn to tech's blue-chip CEOs from his earliest days in Silicon Valley, when he asked for introductions to CEOs like Intel Corp.'s Paul Otellini and Microsoft's Bill Gates.
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Facebook's strategy now reflects more than just Mr. Zuckerberg's thinking. Few early executives remain. Facebook's founding president, Sean Parker, left the company in 2005. In 2008, co-founder Dustin Moskovitz and Chief Technology Officer Adam D'Angelo left to start companies.
After Mr. Parker's departure, Mr. Zuckerberg took sole responsibility and realized he needed help.
Facebook board member Marc Andreessen, a partner at the venture capital firm Andreessen Horowitz says.
"What Mark was doing was cycling through people until he found the ones who could make it happen. It had to be done. The alternative would have been a much lower quality company."
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His top lieutenant is Sheryl Sandberg, who left Google in 2008 to become Facebook's chief operating officer. The 42-year-old created a business model for the company and brought a team of Google ad veterans.
Sandberg said.
"I think of P&G, these companies that are iconic, that change what they do in the industry and then are around for a really, really long time. We need to be around and thriving when Mark is old."
David Ebersman, 41, has been Facebook's finance chief since 2009, and has taken the lead dealing with Facebook's potential IPO bankers.
The company has also bulked up its legal department, starting with the hiring of chief counsel Ted Ullyot in 2008. Mr. Ullyot, 44, a former associate counsel at AOL Time Warner, also worked as chief of staff to then-attorney-general Alberto Gonzales.
Mr. Ullyot has built the legal department to 45 lawyers from 12, allowing the company to quickly respond to legal challenges ranging from intellectual property to privacy.
For his part, Mr. Zuckerberg suggests that "blue chip" doesn't go far enough in defining the role he sees for Facebook.
After being read one definition—that a blue chip is a corporation with a national reputation for quality, reliability and the ability to operate profitably in good times and bad—he said:
"I hope our reputation isn't just national."
COMMENTARY: One of the issues that I have with facebook has always been the privacy issue. Things became so bad, that the federal government finally stepped in, and on November 30, 2011, Facebook, like Google and Twitter before (see my blog article May 31, 2011), settled with the FTC (see my blog article dated November 30, 2011) and was placed on 20-year probation including annual privacy audits. Still, I have my suspicions that Facebook will take the probation seriously, and sooner rather than later, it will violate our privacy again, and come face-to-face with the FTC once again, only this time, Facebook will face some humongous fine.
The other issue that I have with Facebook is its ad-supported revenue model. As I have stated numerous times, Facebook's ad-supported revenue model is fundamentally flawed. It was a "quick-and-dirty" way to monetize the social network, something it borrowed from Friendster and MySpace.
Although Facebook grew impressively from an estimated 500 million users in mid-2010, reached 600 million at the end of 2010, and reported it had hit 800 million users in July 2011, growth is no longer exponential. The number of Facebook users is reaching saturation in many developed nations, including the U.S., The U.K. and most of Europe. Facebook's growth is now generated almost entirely internationally from Asia, India, Latin and South America, where it is experiencing double-digit growth, but growth in those areas of the world, will begin to dramatically slowdown as it too reaches the saturation point.
In a blog article dated March 20, 2011, I stated that Facebook had reached a critical inflection point sometime in the second half of 2010, when it stopped growing exponentially, and that growth in the number of users and advertising revenues would continue to slowdown and eventually peak. That day is coming sooner, rather than later because Facebook cannot count on China, where it is banned.
The above article points out the difficulty that Facebook has had convincing Madison Avenue that it is a viable advertising platform. Numerous studies have been conducted concerning the effectiveness of advertising on Facebook, and the concensus of opinion is that Facebook is not very effective in what advertiser's want the most: Customer sales. As a consequence, many CMO's are using Facebook for strictly for building brand awareness, and connecting and engaging with its fans.
Social media technologies now available have allowed brands to quickly create a fan base, and because Facebook is a "freemium" business, many major brands are spending little on advertising, but are relying on word-of-mouth to create buzz and brand awareness, once they reach a tipping point in their fan base.
IPO or not, Facebook can no longer rely strictly on advertising, and must generate alternative revenue streams in order to keep growing and justify its humongous market valuation of $100 billion if it has an IPO.
93% of Facebook's revenues is from advertising. The other 7% of Facebook's revenues are from sales of virtual goods, mostly from social games running on its platform. The majority of those games are from Zynga, which just had its IPO, and found out the hard way that the "Facebook Halo Effect", did not sprinkle magic dust to boost its market valuation. Stock market analysts had anticipated a 30% pop in Zynga's stock price on the first day of trading, but it dropped 5% instead. Apparently, totally relying on Facebook as a source of customers had a negative, rather than positive effect, and others are questioning its business model and ability to continue to create hit games over the longterm.
Zynga has tremendous growth in revenues, but it has incurred correspondingly high expenses, so it is is under extreme pressure to increase its bottom line, even more so now that it is a public company. It recently announced that it plans on developing its own dedicated game site, which could signal that it will eventually part ways from Facebook, something that should be of major concern to Zuck.
With all thsse concerns surrounding Facebook, its principal selling point has become its "bigness". But bigness for what purpose? It's worked great for social games, but only 3% of Zynga's gamers actually pay, which was a big problem for investors during its IPO. Facebook also thought it could use that bigness to its advantage when it launched Facebook Places and Facebook Deals, but bigness failed miserably, and Zuck shutdown Places and Deals within a few days of each other just recently.
Although growth in the number of users has been stellar, if not exponential, there are definite signs of a slowdown, and if it cannot increase the number of impressions or eyeballs, and prove that it is a viable advertising platform, Facebook's future advertising revenues will begin to slowdown dramatically and eventually peak, hence my critical inflection point theory. To demonstrate its concern, eMarketer recently reduced its forecast of Facebook revenues from $4.050 billion to $3.7 billion.
In a blog post dated November 27, 2011, I predicted that Facebook will have to eventually charge users, something it says it will never do, but I gave several very good reasons why it may not have any choice.
It's obvious that Facebook has to execute a major pivot in strategy at some point to really generate excitement and prove it's not a "one-trick pony," and justify its humongous $100 billion valuation which has been predicted following an IPO sometime in Q2 2012.
Courtesy of an article dated December 22, 2011 appearing in The Wall Street Journal
The alternate value of paper papers for deal is that they might as well be unhindered of any literary theft confusions and spelling oversights
Posted by: free essays | 12/22/2011 at 12:18 PM