Facebook has been in the news recently because of its filing for an Initial Public Offering (IPO) with the Securities and Exchange Commission. At last we have the opportunity to see their financial performance and their expectations about their risks and opportunities. Here is my assessment of the document.
We Can’t Live Without It.
Facebook has amassed an unprecedented 845 million users as of December 2011. The number of users on the web is increasing as is the amount of time they spend. However they go to few websites. People spend more time on Facebook than any other website in the world. Every day the average active user spend about 11 minutes on Facebook. That amounts to 9.7 billion minutes per day! Facebook has pronounced effect in European countries. Separately, Facebook reported that Iceland and Denmark are the world’s two most “Facebooked” nations in the per capita percent of users and the depth of usage.
Facebook has a tremendous market opportunity. As a global media platform, it sees nothing less than capturing a large share of the global advertising market, $588B according to their report. They booked $3.7B in revenue in 2011 ($557M to gaming transactions and the rest to advertising), and they have a 27% operating margin, very close to Google’s 26%.
Facebook expects to take a larger share of the print advertising market as well as that of radio and television. These three traditional formats comprise 63% of total global advertising. Thereafter Facebook’s key opportunity is mobile. Half of all its users access the platform with a mobile phone, and this interaction they do not monetize today. So, if Facebook can make meaningful advertising in mobile, their revenue is assured.
We Can’t Live With It.
While users and advertisers get benefits from Facebook, its dominance poses threats for other industries and raises challenging economic questions. Naturally Facebook wants the public and investors to “Like” it so as to increase the money raised from the IPO and the associated market valuation. To that end, Facebook has been successful to endear itself to journalists and policymakers. It even commissioned Deloitte to make a report showing that Facebook adds €32 billion to the European economy and supports 232,000 jobs. Incidentally the numbers from the Deloitte report are not based on actual data from Facebook, just economic indicators. The prospectus for the SEC, on the other hand, spells out the risks and dangers for Facebook.
Facebook dominance can be particularly felt in Europe where there are fewer social media players, unlike the USA. It amasses more traffic–and revenue–in certain advertising categories than its local country competitors. In Denmark for example, Facebook, Google and YouTube account for more time and traffic from Danish users than the top 20 Danish websites combined.» While there is nothing wrong for users to go to the websites they prefer, this reality has implications for tax revenue (no longer collected in Denmark when advertisers place ads on these networks), firm competition (local players consolidate or go out of business), infrastructure (by whom and how should information infrastructure be funded) and governance (most shareholders and employers are outside of the local jurisdiction).
Facebook also poses challenges for the telecom industry. Users go increasingly to just a few websites (Google, Facebook and YouTube), but those websites don’t want to support the development of telecom infrastructure. Instead Facebook expects operators and national governments to fund infrastructure investment to meet consumer demand for higher speed connections. This become increasingly difficult as operators experience a decline in revenue (Denmark’s operators have experienced a 20% decrease in SMS traffic because users send free SMS by Facebook.» ), and nations have less tax revenue because global platforms exploit legal tax havens in Ireland, Netherlands and the Caribbean.
Future of Facebook Still Uncertain
A number of analysts reacted to the Facebook filing saying that the company’s expectations are inflated, user growth is slowing, and that it lacks a “silver bullet” for advertisers such as AdWords. It remains to be seen whether Facebook can execute with the money it raises on the IPO to hire and acquire the talent and technology to grow while still keeping current employees motivated.
Roslyn Layton advises companies on digital strategy. She is Senior Director of Klean, a Danish IT house. Previously Roslyn served as a Director of Coremetrics IBM (San Mateo, CA, USA), the preeminent online marketing optimization platform, enterprise software-as-service (SaaS) for 2000 of the world’s leading companies. She is a contributor to Search Engine Marketing and author of Key Performance Indicators to Manage For Profitable Business Online (McGraw-Hilll, 2009).
A global marketing and business development professional who has clients in many countries, Roslyn has worked in disruptive technologies at the Innovation Labs-Hyderabad of Tata Consultancy Services, India’s leading outsourcing software company. She is on the board of Silicon Vikings, a networking organization bridging the intersection of the Nordics and Silicon Valley. Roslyn also serves as President of the OneMBA Alumni Association, a innovative executive MBA program of five of the world’s leading business schools: Rotterdam School of Management, University of North Caroline Chapel Hill, Chinese University of Hong Kong, EGAGE-Mexico, and FGV-Brazil. She is a cum laude graduate of international service, Japanese, and economics of the American University-Washington, D.C.