Facebook walks a fine line
Social network balances profit with risk of alienating users
As Facebook Inc. explores a broader range of money-making businesses, such as video ads and music streaming, it will need to shake off the growing pains that marked its first quarters as a public company.
Slowing revenue growth and sagging shares have ratcheted up pressure on Facebook to find new ways to generate sales. At the same time, the world’s largest social network will have to assuage concerns about privacy rights, woo investors and stay true to chief executive officer Mark Zuckerberg’s pledge that Facebook is more a social movement than a business.
“It’s a fine line that they have to straddle,” said Victor Anthony, an analyst at Topeka Capital Markets Inc. “It’s all part of the growing pains.”
Instagram, Facebook’s photo-sharing business, incited a backlash last month by fuelling concern that it would sell users’ images to advertisers without consent. Facebook also ran afoul of privacy advocates last month after a shift that gave users less voting control over changes to privacy and data-collection policies.
As the company harnesses data posted by its more than one billion users to help advertisers market wares, Zuckerberg risks alienating consumers and compromising his stated goal of making the world “more open and connected.” Facebook has already come under scrutiny by regulators in Europe and the U.S. amid concern it hasn’t done enough to protect privacy.
Though the stock has pared some losses since September, Facebook’s shares are down 26 per cent since its May initial public offering as investors seek evidence that the company can step up advertising-sales growth. Facebook needs more money-making ad products, and it’s finding user backlash a tough obstacle, said Rich Greenfield, an analyst at BTIG LLC in New York.
“How much advertising can they push without upsetting the user?” Greenfield asked in an interview with Bloomberg TV last month. “You have seen a dramatic change in body language out of the company. Now, they have really focused on monetization.”
Analysts on average are projecting more slowing this year. Revenue may rise 30 per cent to $6.53 billion US in 2013, compared with estimated 35 per cent growth last year, according to data compiled by Bloomberg. Sales leaped 88 per cent in 2011. Sales of virtual goods for games such as Zynga Inc.’s FarmVille, once considered a hot area of growth, declined in the third quarter from the prior period.
Facebook is “just getting started” on new paid products, Zuckerberg said during a third-quarter earnings conference call. Every product group is asked to generate ideas on how to bring in revenue, he said at the time.
Making money hasn’t always been Facebook’s top priority, according to Zuckerberg.
“We don’t build services to make money,” he wrote in regulatory filings outlining Facebook’s IPO plans. “We make money to build better services.”
“Facebook was not originally created to be a company,” Zuckerberg, 28, wrote. “It was built to accomplish a social mission.”
Still, Facebook has already shown that it can quickly and successfully introduce new products. Shares have rallied 60 per cent since slumping to a low of $17.55 in September on signs that mobile-ad growth is accelerating. Facebook debuted mobile tools last year to take advantage of faster user growth on wireless devices.
Facebook is expected to report $339.3 million in U.S. mobile ad revenue for 2012, up from zero the prior year, according to research firm EMarketer Inc. In 2014, Facebook’s U.S. mobile ad revenues may exceed $1.2 billion, grabbing 11 per cent of the market, the researcher said.
Video advertising, music and video streaming services, expanded payment services and a social search engine are among additional revenuegenerating features Facebook may choose to roll out.
“It’s not a non-profit,” said Brian Wieser, an analyst at Pivotal Research Group LLC. “They are looking for lots of ways to make money. You have to expect they’ll want to try hundreds of things.”
Wieser said Facebook could sell video ads, a market that will reach more than $8 billion in 2016, compared with $2.93 billion last year, according to EMarketer.
The social network might also seek to follow Amazon.com Inc.’s and Apple Inc.’s moves in selling music and offering movie rentals, Wieser said.
“These are forms of content distribution that could benefit from social,” he said. “It’s very realistic that they could choose to go there.”
Another money-making venture may lie in Facebook’s Gifts feature. The social network could generate revenue from suggesting purchases related to user posts, said Martin Pyy kkonen, an analyst at Wedge Partners Corp. Someone posting photos from a ski trip, for instance, may get offers for a lift pass or a new pair of skis.
“The biggest opportunity is Gifts,” Pyykkonen said. “It’s going to become bigger and bigger.”