MARK ZUCKERBERG PREPS FACEBOOK FOR ITS IPO, BUT GROWTH IS PEAKING, AND THERE IS NO IMMEDIATE SOLUTION, WHAT TO DO?

Facebook Inc. is gearing up for what is expected to be one of the biggest-ever initial public offerings for a Web company. But as the social network moves toward an IPO it must prove to investors that it is ready for the big time.

That task falls to Chief Executive Mark Zuckerberg, 27, who built Facebook out of his Harvard College dorm room in 2004, and Chief Operating Officer Sheryl Sandberg, 42, a former Google Inc. executive.

 

Facebook is gearing up for what is expected to be one of the biggest-ever IPOs for a web company. Shayndi Raice on The News Hub discusses her interviews with Facebook's CEO Mark Zuckerberg and COO Sheryl Sandberg. Photo: AP

Mr. Zuckerberg, who had long said he was in no rush to go public, has focused on building social features for the site, while Ms. Sandberg has spent the last 3½ years cultivating relationships with global brands and developing new ways for marketers to reach Facebook's users.

Let's look at some internet startups and how they fared since their IPO's

IPO: Go or No-Go? - Internet Startups and their IPO's from 1997 through 2011 - Market Capitalization (Click Image To Enlarge)

IPO: Go or No-Go? - Internet Startups and their IPO's from 1997 through 2011 - Change in Adjusted Share Price (Click Image To Enlarge)

IPO: Go or No-Go? - Internet Startups and their IPO's from 1997 through 2011 - Split-Adjusted Share Price (Click Image To Enlarge)

During that time, Facebook's advertising revenue has grown to $3.8 billion in 2011 from $264 million in 2008, according to estimates from research firm eMarketer. By the end of this year, eMarketer estimates Facebook's annual revenue overall will reach nearly $6 billion.

Mr. Zuckerberg and Ms. Sandberg talked to The Wall Street Journal in October in separate interviews about their strategies for the Menlo Park, Calif., company. Interview excerpts follow.

Mark Zuckerberg, CEO, Facebook

Mark Zuckerberg

WSJ: How has Facebook changed when it comes to trying to make money?

Mr. Zuckerberg: I built this as a product and not initially as a company. What ended up happening after we started hiring more people and building out the team is I began to get an appreciation that a company is a great way to get a lot of people involved in a mission you're trying to push forward.

WSJ: How does that work?

Mr. Zuckerberg: Our mission is getting people to connect. There's a very deep appreciation inside this company that in order to make that all work, we need to build a really strong business and that means we need to serve that class of partners well on the marketing side, build good products for them and appreciate that we need to grow at a certain rate to attract the kind of people we need to keep attracting.

WSJ: What do you say to those who suggest Facebook can't grow revenue without alienating users?

Mr. Zuckerberg: It's not mutually exclusive. Serving more people, increasing your customer base and making them more deeply engaged is by itself good business. People used to say to me that in order for Facebook to work, we somehow need to sell out. The best way for Facebook to work is do exactly what people want.

WSJ: What's the company's first focus, business or product?

Mr. Zuckerberg: The thing to take away isn't that we don't care [about business]. People for years were asking me why aren't we trying to make more money. I would say I'm trying to build a business for the long term and it was clearly the right strategy. I think the same is true now. Maybe there will come a time down the road when most of the industries we think should be social are already social and the primary thing we can do is optimize the amount of money we can make.

WSJ: What companies do you admire?

Mr. Zuckerberg: Amazon is a great recent example of focusing on the long term and accepting shorter margins on the short term. [Amazon CEO] Jeff [Bezos] went through years of people thinking he's crazy.

Apple is amazing in terms of the quality of stuff that they do. And Google, too, for the same thing.

WSJ: Do you place Facebook in the same category as those businesses?

Mr. Zuckerberg: I hope one day we will be. We're a lot younger than all of them and still quite a bit smaller in terms of size of employees. Because we focused so much over the past five or six years on building things that are going to have lasting value for people, I think we have a good shot at that.

Sheryl Sandberg

Sheryl Sandberg, COO, Facebook

WSJ: What steps does Facebook still need to take to solidify its position?

Ms. Sandberg: We want to see sharing increase. We want to see users continue to grow but as we already have more and more users, the growth comes from activity. We are really emphasizing what people do. This is about making sharing natural, easy and a part of people's lives.

WSJ: How does that help Facebook make money?

Ms. Sandberg: Sharing activity drives advertising revenue for us. It's important for big businesses and brands, but also really important for small businesses. A lot of them do advertise and if they continue to grow, they will [advertise]. Even if they're not advertising, [they're] driving users and driving engagement.

WSJ: What is the long-term vision for Facebook?

Ms. Sandberg: We would like everyone who builds products to use Facebook. Our vision is that industries get disrupted and [they get] rebuilt with people at the center. The gaming industry has been really impacted by these social gaming companies like Zynga and Playdom. By putting people at the center, they took a totally different approach to games. We think this will happen to every industry.

COMMENTARY:   In a prevous blog post dated  December 22, 2011, I commented on how Mark Zuckerberg is trying to make Facebook more "blue chip" by changing its "cool" culture in anticipation of its IPO in early 2012.  In that blog post, I criticized Facebook's ad-supported revenue model as being "fundamentally flawed" and a "quick and dirty" way to monetize the site, patterned after Friendster and MySpace.  Again, I mentioned my blog post dated March 20, 2011, in which I pointed out that Facebook's user growth is no longer exponential, and that it had reached a "critical inflection point" sometime towards the end of the year 2010, and that growth rates would eventually plateau, as membership reaches saturation worldwide. 

The above interview of Zuck and Sheryl didn't make it clear just how Facebook is going to increase fan engagement.  Engagement is the responsibility of the user or brand, not Facebook. Brands do this by offering relevant, interesting and informative content and product offers that encourage engagement with the brand.  Zuck says the mission of Facebook is to connect people.  Again, Facebook is a facilitator of connections, it does not actually create connections.  It's up to each user or brand to create interaction by sharing of information and content, gaining trust, then hoping that a connection is made.  

Zuck side steps the issue that their ads will become too invasive.  At the present time display ads are placed on the right hand side of the user page.  They are quite transparent, hardly noticeable, and mostly ignored.  However, beginning this year, Facebook ads will become more interruptive by introducing two new "in your face" advertising products:

• Suggested Events - Facebook is slated, more than ever, to hugely invade what you thought was just your own personal space.  Essentially, through Facebook’s new Suggested Events feature, Facebook attempts to predict where you might want to go by looking at your interests and previous events that you attended.    There’s a lot of concern that this new feature is way, way too creepy. How does Facebook know where I want to be in the coming weeks? And worse, what if it’s right?
• Sponsored Stories -  What that means is that users will begin seeing ads featuring their own friends that have indicated their "like" of a company or brand’s Facebook page, and the ads will then prompt them to do so as well.   What is ticking off a lot of users is that Facebook plans on place Sponsored stories ads in your news feeds.  This is akin to going from simply having product placements to full-blown commercials.  The move to advertising in a user’s news feeds will certainly pissoff many Facebook users.

The problem with Facebook's two new ad products is that they are a direct invasion of our personal and private page which many of us treat as sacred and untouchable. Therein lies the conumdrum of social media.  It does not easily lend itself to advertising because ads create too much clutter, interruptions and interfere with our full enjoyment of interacting with others.

Clearly, Facebook should not emphasize more ads, but better ads, that are less invasive.  I think that when these two advertising products have been fully evaluated for their effectiveness, ROI's and invasiveness, the data will clearly show what I just said.

Up to this point, Facebook has sold its "bigness," something I have often referred to as the Facebook Halo Effect--an attitude that social giant is the "Holy Grail of Advertising" because it has the eyeballs.   500 million was very impressive in mid-2010.  By the end of 2010 the number of Facebook users had grown to 600 million worldwide.  In early September, Facebook reported it had hit 800 million users,  even more impressive.   However, brand marketers are not buying bigness anymore.  They are looking for effectiveness and ROI's, and the data from numerous studies clearly show that Facebook does not measure up to traditional advertising channels.  Video and search is kicking social's butt.  Social media simply does not drive significant traffic to a brands website or generate substantial sales lift in the form of repeat sales. Instead, brand marketers are using their Facebook pages as social channels for interacting and engaging with their fans, obtaining feedback on their products and services, and conducting marketing research.  Brand marketers now have the tools to measure interaction and engagement, and there are plenty of social media marketing and management firms that provide them with expert advice to manage their large fan bases.  The fact that Facebook does not charge users, and claims that it never will, has created legions of freeriders who prefer to grow their fan base until it reaches critical mass so that WOM can kickin naturally.  Simply put, brands have no insentive to advertise, many of them simply ad links within their newsfeed.

Having said this, Facebook has also been something of a failure when it has come to developing new sources of revenue.  Facebook failed to gain traction with both Facebook Places, its location-based checkin service, and Facebook Deals, its daily deals offering.  Facebook did a major pivot on these two services, and they were shutdown in October 2011 within a few days of each other.  In effect, Facebook surrendered LBS services to foursquare the LBS champion, and daily deals to industry leaders Groupon and LivingSocial.   In December, Facebook did another pivot, this time acquiring Gowalla, a location-based social network.  Gowalla was going nowhwere, losing money, and Facebook acquired them on the cheap, but I would like to to know its strategy to turnaround Gowalla so that it can effectively compete against foursquare, the LBS leader with nearly three times more users.  I blame Chris Cox, Facebook Vice-President of Products for the Facebook Places and Facebook Deals debacle.  Just what the hell is this guy doing?  He seems like a nice enough guy, but he should explain that Gowalla acquisition.  This is a 180 degree turn in just a about a month.  Location-based social networks have a huge adoption problem, with only about 4% of adult internet users using LBS sites like foursquare, Gowalla or Loopt, the three largest LBS services.  With those adoption numbers, I doubt they are generating much in revenues or earnings.  I actually predicted that the wheels would come off of the LBS train by the end of 2010, and Gowalla appears to be the first victim, since it soldout to Facebook.  VC's keep throwing money at LBS sites, and that's the only thing keeping them afloat.   I guess we will have to wait until the end of 2012 to see if LBS has any traction and my prediction finally comes true. 

Now I hear that Facebook wants to capture a piece of the mobile ad market. This might work since roughly 50% of Facebook's monthly active users access the social giant through a Facebook app. However, Google and Apple are not likely to help them much, since they want to dominate the mobile ad market themselves.  The answer: Facebook is working with Samsung to introduce their own Facebook smartphone.  Good luck with that one.  That phone better be pretty damn good. Okay, I will admit that Samsung makes pretty damn good phones running Google's Android, but a Facebook phone is not the solution.  I just don't think that people will buy a Facebook phone simply for its social feature.  

In short, Facebook needs to broaden its market reach.  Ask themselves, "What would Steve do?"  It cannot be a me-too or follow the market leaders. It really needs a Blue Ocean Strategy, and be able to create markets in which they can create uncontested market space and make the competition irrelevant.  This leaves ecommerce, or more specifically social commerce or F-commerce (an acronym for Facebook commerce).  Facebook could use its bigness to attract brands willing to tap into Facebook's huge user base.  This is where Facebook can truly leverage its bigness.  So far, there have been few major brands willing to make the jump to an all-exclusive f-commerce site within the Facebook's Garden of Eden, but revenues from this effort are unknown. Estimates of F-commerce are not encouraging, and are projected to hit only about 3% of all U.S. ecommerce sales within five years.  According to eMarketer, U.S. ecommerce sales are expected to hit $195 billion in 2011.  Using 2011 as a benchmark, this translates into roughly $6 billion in F-commerce sales.  Facebook would retain 30% or roughly $1.8 billion.  However, that 30% is a deal-killer for many brands, and will really squeeze their profit margins.  Facebook better plan on reducing the split from 30% to a more palatable 15%, which would generate an additional $900 million in F-commerce revenues. (using year 2011 US ecommerce sales).

In a blog post dated November 27, 2011, I actually believe that Facebook will begin to charge users, and gave several very good reasons for this.   Not everybody would be charged, but this would elimiate a lot of duplication of pages, reduce freeriding, and encourage interaction and increase connections and sharing.  Users would feel more like they need to get their monies worth, and start using the site more.      

I know this all sounds like a ass-kicking of Facebook, but I have not been impressed with Facebook's revenue estimates, and can't for the life of me justify a valuation of $100 billion when it has reached a critical inflection point and is close to peaking in users and ad revenues.  I guess we will just have to wait and see what Facebook's real revenue, earnings and traffic numbers are, their business risks, and their strategy to operate moving forward.  Investors are gonna want to see a huge upside, and so far I just don't see it.  Surprise me Zuck.  

Courtesy of an article dated January 14, 2012 appearing in The Wall Street Journal and an article dated December 23, 2011 appearing in MSM Desigz Blog

Comments

[Tommy]

Freelance writing opps,

Facebook is very successful, they are the largest social network in the world. This is undeniable. On the other hand, there is overwhelming evidence that Facebook is not very effective as an advertising platform. Facebook is again raising their CPC and CPM rates, in spite of this overwhelming evidence. FB is a Mecca for freeriders, so there is no incentive for them to pay for ads. Growth is flattening very rapidly, peaking would be more like it, which will make it difficult to raise ad rates, and therefore advertising revenues. I think the support I provided should make this very clear. I am glad you like FB.

[freelance writing opportunities]

but if you will see, it works! so.. go on! :)