If you haven’t heard, all signs are pointing to a Facebook IPO in 2012. And if you have heard, I bet you know exactly two things about that fact:
- Mark Zuckerberg will become very, very rich.
- Facebook is HUGE!
True enough. But let’s look into the whole situation a little more deeply with an infographic created by AccountingDegreeOnline. The first bit isn’t totally surprising--but when you see the numbers laid out, it’s rather breathtaking. It’s thought that Facebook’s IPO will raise $10 billion and place Facebook’s value at $100 billion. To put that in perspective, only companies such as Visa and GM have ever raised so much in an IPO. And the $100 billion valuation will make Facebook a more valuable company than McDonald’s:
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Now, you might chalk this up to untreated Internet madness, a la 1999. But the thing is, the Facebook IPO becomes more astonishing when you consider the merits of the business. This isn’t like Pets.com. If anything, it’s surprising that the company isn’t thought to be worth more. Just consider: By the end of 2012, Facebook will have signed up more than 1/10th of the human population. The. Human. Population. I’m not sure that any business has ever had such a vast audience of users. Moreover, it will already control 28% of the ads seen online and 1/6th of display-ad revenue in the U.S.:
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Take a step back and consider Facebook’s growth prospects. When you use the service, it’s actually surprising that the ads remain as unobtrusive--and as limited--as they are. It’s not gummed up with blinking exhortations. And the ads they do have seem relatively well targeted. The point I’m trying to make is that Facebook hasn’t even begun to test what it can really do with ads--and I have no doubt there are fleets of designers and programmers busily working all that out as I type. (Sure, it’s 4 a.m. right now in Palo Alto, but you know what? No one ever made a billion dollars by being lazy.)
The business analysts who tout the IPO will all tell you that the biggest risk to Facebook’s business model is continuing growth in their ad business. But that’s not it at all: It’s that they’ll constantly need to fight against their own ad-free history, while trying to make more and more ad money. They have to balance giving us, the audience, a good enough service that we’ll put up with more ads. But it’s up to them to figure out how many ads--and what kind of ads--they want to risk.
Thus, companies such as Facebook and Google are in a position quite unlike any other business out there: In some sense, it’s up to them to determine how big they want to get, and how much money is enough. What a hell of a fortunate position to be in.
COMMENTARY: In spite of the tremendous hype surrounding Facebook, Mark Zuckerberg, and the mega-IPO scheduled for early 2012, I am not 100% convinced that Facebook is the Holy Grail of online advertising that so many analysts have predicted. There are many reasons why I say this, but I am not the only one. The fact of the matter is this:
- In a blog post dated January 4, 2012, I described in great detail why Facebook is running out of eyeballs, is quickly reaching saturation in many areas of the world, and its growth in users will dramatically slowdown and eventually peak. Advertisers pay for ads based on the number of impressions, and Facebook's ad impressions will eventually peak, and so will its ad revenues.
- In a blog post dated March 20, 2011, I explained to you in great detail why the ad-supported revenue model of Facebook (and social networks in general) is deeply flawed and that the social media giant reached a Critical Inflection Point sometime towards the end of 2010, and its growth is no longer exponential, and growth rates will continue to decline until user growth peaks. The ad-supported revenue model was a "quick and dirty" way for social networks, beginning with Friendster, then MySpace, and now Facebook, to monetize their sites, and has remained relatively unchanged since then.
- In a blog post dated November 27, 2011, I provided some very good reasons why I thought that Facebook would eventually have to charge its users. Think about it, if Facebook is running out of eyeballs, it's potential for generating advertising revenues is also limited.
Although Facebook has developed a successful business model, and will generated an estimated $4 billion in ad revenues in 2011, I can't think of many companies with so much of a potential downside. Facebook is having its IPO when its eyeballs are drying up and its advertising revenues are quickly coming to a peak. Unless it can gain entry into China, something that is very unlikely, I can't see how it will continue to grow users to push its peak growth into the future.
Facebook can no longer rely strictly on advertising revenues, but must diversify, and will probably use some of that $10 billion it will raise from a successful IPO to make strategic acquisitions that will allow it to rely less on advertising.
To its credit, Facebook generates 7% of its revenues from social game giant Zynga, which relies exclusively on Facebook for its gamers. Zynga had its IPO on December 16, 2011, but instead of an expected pop from its $10.00 IPO price, ended the trading day at $9.50. Analysts blamed Zynga's disappointing IPO on its reliance on Facebook, weakness in its revenue model (only about 3% of its gamers actually pay, the rest of them are freeriders), and a continuing drop in earnings due to high operating expenses and the cost of developing its games. Zynga pays Facebook 30% for sales of virtual goods, the key source of its revenues, but Zynga has plans to develop its own site, has $1 billion from its IPO to do so, and may cut the cord with Facebook. Stay tuned for future developments.
For its part, Facebook has been a failure in generating significant revenues from other sources besides social games.
- In a blog post dated August 26, 2011, Facebook announced that it had shutdown Facebook Places, its location-based check-in service, effectively turning over the LBS market to foursquare. In a blog post dated December 5, 2011, Facebook announced that it had acquired Gowalla, a location-based social network. This acquisition came three months after it shutdown Facebook Places, but Gowalla lags well behind foursquare, and is probably not generating much in revenues, so the reasons for the acquisition remain a mystery.
- In a blog post dated August 29, 2011, Facebook announced that it had shutdown Facebook Deals, its daily deals service, effectively surrendering the daily deals market to industry leaders Groupon, LivingSocial and Google Offers.
Facebook needs a significant new source of revenues with the potential to become a home run, but the only source of revenues with that type of potential is social commerce or f-commerce (short for Facebook commerce). However, in a blog posts dated July 4, 2011 and July 9, 2011, strong evidence was presented that refutes social commerce may experience the explosive growth that has been predicted.
I have always been suspicious of startups that don't make anything, and the only thing of value for Facebook is its large user base. For the last two years, Facebook has been selling "bigness" or the Facebook Halo Effect as I often refer to it, but even large national advertisers are not convinced that Facebook can generate the type of ROI's they can get from traditional advertising. Many of them have become freeriders, preferring to acquire followers, then when they reach critical mass, rely on WOM to drive engagement and brand loyalty, and if they can generate revenues, its a big plus.
It is obvious that Facebook must generate big, new sources of revenues to justify the $100 billion valuation predicted after its IPO. If anyone can tell me where those revenues will be coming from post a comment.
Courtesy of an article dated January 13, 2012 appearing in Fast Company Design
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