The most talked about company award this week goes to Facebook (FB), thanks to their IPO which launches on the Nasdaq tomorrow. They’ve set the share price range at between $34 and $38 for 421.2 million shares and it’s oversubscribed by as much as 25 times.
But there are those sceptics who say the price can’t be justified as their current earnings of $3.2bn make the whole thing look like a magic trick. The Wall Street Journal indicates that professional investors are selling their holdings as they don’t feel there’s a lot of upside on the pricing. Here’s some thoughts on its strengths/weaknesses:
On the worrying side
Zuckerberg maybe Mr-Down-to-earth, but what if he leaves? Some fear that the company, as valuable as it is, wouldn’t be as good (whatever that definition is) at scaling and providing ROI without him. It’s Apple without Jobs, Virgin without Branson, The Stones without Jagger. Zuck is trusted at the moment to put the company first – he’s turned down small fortunes to fulfill his dream of a connected world. A market capitalisation of $100billion on one pair of shoulders creates risk.
Trends change. Levi jeans were cool, but when an overweight Jeremy Clarkson wears them every day, the 17-year-old with a nose stud would rather drink creosote than be seen in a pair of 501s. The fear here, is that will kids just skip Facebook for ‘the next big thing.’ When your folks, your grandparents and school teacher are on FB, suddenly it doesn’t feel so cool does it? Its popularity may actually hurt it.
Perhaps there’s social media fatigue coming. I don’t buy that entirely, the social genie has well and truly left the lamp. There may be the need for more personal, more friend-orientated platforms and not the ubiquitous, chase-down-your-ex-boyfriend that is FB, but 900 million users aren’t going to stop engaging en mass. MySpace and Friends Reunited may have shriveled but social contact didn’t die with them.
Ads are where the money guys are thinking but if it’s ‘social’ you’re looking for, a raw advert is arguably out of place. These will become largely ignored like the ubiquitous banner, unlike when you’re Googling for something.
That said, they are growing their ad business: $3.2bn last year up from $272mn in 2008, but GM is an A-lister who’s ditching their paid-for ads on FB. One small hole doesn’t sink the ship but will others be looking at jumping due to a poor ROI and a fear of FB’s need to milk them dry and grow revenue?
Mobile is how we prefer our social lives with over 50% of FB’s daily users using mobile for the platform (80% of UK twitter use is via mobile). Unfortunately for Zuck it’s far more difficult to provide mobile ads that don’t infringe on the user experience on the small screen.
Sponsored stories (i.e. another form of paid adverts) are where you vote for something and FB turn that vote (and your profile photo) and posts it out to your friends. They charge for this and believe there’s growth there.
On the plus side
FB get 30% of revenue from gaming and apps. This is definitely set to increase as popularity grows.
Despite their $3.2mn in sales which are heading north (perhaps towards $6bn this year), I somehow can’t believe that’s where their true growth will come from. Facebook is arguably the web’s barometer. As you browse online, they are collecting your every click, even off Facebook. They know what you really like not just what you tell the world you like by clicking the thumb icon.
This is the ultimate PhD study of humans’ digital habits. Big Data is the understatement of the year. This is where their value lies – in data mining on scales never seen before. Not even the credit card companies could come close to matching this jigsaw of contact, profiles, postings, places and likes. It’s the holy grail of connectivity and insight. How much will Big Co pay for that? Will there be a backlash if they do?
The freemium pricing model works because you get to charge some of your power users. What’s stopping FB charging companies in the future for their pages? If you’re so embedded in the platform, they really would have you by the throat when they hit you with a £99 per year service charge. They would need to price the fee at a sweet spot and not scare off too many organizations with pages and hundreds or thousands of fans.
You get money from customers not users. Apple and Amazon have customers (and their credit cards in the system), FB has users. But there’s the huge opportunity here for payments and banking to go through FB as it’s got the unique user base of consumers plus companies. Add trust and brand equity to that and when I’m logged in via my phone and swipe it across the register in Starbucks, or Top Shop, or Sainsbury’s, money from my Facebook bank account could appear in their Facebook banks (along with a ‘like’, of course). Micro payments between individuals become a simple reality. I predict FB buying a company to give them a jump-start in this space and offering a huge convenience for its users (not the companies trying to sell to those users) whilst clocking up small commissions.
Honestly, I have no real idea about pricing shares but FB looks set to rise initially as the frenzy takes hold. But Zuck is going to have to push development heavily to innovate and generate revenue streams in areas as yet untapped and justify the price.
Side note worth remembering:
When the telephone was introduced in 1876, a Western Union internal memo noted: “This ‘telephone’ has too many shortcomings to be seriously considered as a means of communication. The device is of no value to us.“