Facebook filing raises risks
The numbers in Facebook’s IPO filing this week give us the picture of a titan, but not an unstoppable one.
Such filings, as a matter of course, must recite a list of even the most unlikely of risk factors. Many are just boilerplate, a legal covering of one’s butt, if you will. And that’s certainly the case with many of Facebook’s risk disclosures.
But there are four areas where the company shows clear vulnerability. In fact, it’s not exaggerating to say that, in some cases, these issues could sabotage the company’s growth, if not derail it completely:
MOBILE
This subject was the most startling and revealing. Facebook said it had 425 million monthly active users who access Facebook through a smartphone, tablet or some other mobile product. That’s more than half of the 845 million who use Facebook.
The problem: Facebook serves no ads on its mobile products. And therefore, it makes no money directly from those mobile users. “We do not currently directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven,” the Facebook IPO filing says.
If users continue to increasingly access Facebook mobile products, and without monetization strategies for mobile users, financial results may be negatively affected, the company said. Everyone knows mobile is not just the future; it’s today. And yet, Facebook just got around to releasing a version if its mobile app for the ipad a few months ago. So what is Facebook’s plan to capture the mobile market?
“We believe that we may have potential future monetization opportunities such as the inclusion of sponsored stories in users’ mobile News Feeds,” the IPO filing reveals.
In other words, not much. The lack of a clear mobile strategy was the headline for Chris Silva, an analyst with Altimeter Group.
“The fact that they haven’t done anything with mobile, it serves as an Achilles heel,” he said.
“This is an organization that has massive traffic, but they just developed an ipad app. They’ve been very slow to pick up mobile. They’ve left the opportunity to their partners.”
How worried should Facebook and potential investors be? “I think it can materially change the fortunes of Facebook,” Silva said.
ZYNGA
We’ve long known the San Francisco-based creator of social games such as Farmville and Cityville has been one of the most popular attractions on Facebook. Still, the IPO filing revealed that 12 per cent of Facebook’s revenues come through ads and payments from Zynga games. What’s more, that’s up from 10 per cent the previous year.
Zynga, for its part, had an IPO last December, and had already revealed that it’s still primarily dependent on revenue from its Facebook games. But now we learn facebook seems toneed Zynga almost as much, making it one of the most intriguing and symbiotic relationships on the web.
So Facebook needs Zynga to keep making hit games almost as much as Zynga does. And Facebook founder Mark Zuckerberg and Zynga founder Mark Pincus need to keep the other smiling. “If the use of Zynga games on our Platform declines, if Zynga launches games on or migrates games to competing platforms, or if we fail to maintain good relations with Zynga, we may lose Zynga as a significant platform developer and our financial results may be adversely affected,”
according to Facebook’s IPO filing.
USER GROWTH
The company has built its remarkable revenue growth by insisting it was mainly focused on building its user base. The strategy has paid off, and Facebook has silenced the doubters.
But there are only so many people online, about 2 billion, and Facebook has 845 million of them. Subtract the 500 million in China, and there aren’t many left to get. So, inevitably, growth slows. “We anticipate that our active user growth rate will decline over time as the size of our active user base increases, and as we achieve higher market penetration rates,” the prospectus says.
So, during the past year, Facebook has shifted to emphasize plans to increase what it refers to as “engagement,” or essentially the amount of time we spend doing stuff on Facebook. “To the extent our active user growth rate slows, our business performance will become increasingly dependent on our ability to increase levels of user engagement in current and new markets,” the prospectus says.
The open question, then, is whether the same people doing more stuff, posting more photos and sharing more links will allow Facebook to continue growing revenues and prof- its at the same clip.
Silva, for one, was quite optimistic that changes Facebook is making will allow it to make more money from each user.
He points to changes such as Timeline, the name of the new layout for users’ profiles, and the “open graph” that allows other services to feed activities of users directly into Facebook as reasons to believe the social network can address this challenge. “They still have a massive number of users to capitalize on,” Silva said. “Timeline and the open graph will up the engagement ante. There’s a lot more juice they can get out of this orange.”
GOVERNANCE
Zuckerberg has arranged extraordinary agreements that allow him to vote the shares of his biggest investors. That gives him final say on just about all strategic decisions and corporate governance issues.
In an era where the trend is to push for greater shareholder democracy, Zuckerberg has created something closer to a dictatorship, albeit a benevolent one. Or so he says.
That’s fine as long as things are hunky-dory and growth and profits are headed up and to the right.
But if there is a stumble, all the criticism will probably fall on Zuckerberg’s shoulders.