The big news in tech this week is the initial public stock offering (IPO) for Facebook. With 835 million users worldwide – 18 million of those from Canada – Facebook has extraordinary reach (it is the number #2 website in the world behind Google). Coupled with the fact that Canadian Facebook users spend between one and two hours on the site each day, the value of Facebook is unquestionable huge. However, Facebook has struggled to adequately capitalize on its wide reach leaving question as to whether its $96 billion (USD) valuation may be high.
In its initial S-1 filing to U.S. Securities and Exchange Commission (SEC), Facebook gives a candid risk assessment of threats to its future business. Among them:
“We generate a substantial majority of our revenue from advertising. The loss of advertisers, or reduction in spending by advertisers with Facebook, could seriously harm our business”
And in a subsequent S-1 filing last week, Facebook further elaborates:
“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.”
Last week, digital measurement agency Comscore released a report revealing that a majority of Facebook users access Facebook via smartphone, and smartphone users spend more time per month on Facebook than those accessing the platform from a home computer. In light of Facebook’s admissions this is a troubling insight because smartphone users are overwhelmingly in the 18-40 demographic. The implication of Comscore’s report and Facebook’s admission is that their advertising does not reach a large majority of the populous in key advertising demographics. Their further elaboration that they don’t have a plan to rectify this should be concerning for both investors and advertisers alike.
Microsoft’s Bing also rolled-out social search functionality last week, which is most likely a precursor to the anticipated search product from Facebook. What is particularly troubling about the Bing product is that the search results are oftentimes less relevant than similar searches on Google, undermining the social element of search. The key takeaway being that a strong search engine is the impetus for social search, not simply the inclusion of social into search. Understanding that Microsoft has spent roughly $2 billion dollars (US) per year for the last few years on Bing, this doesn’t bode well for a stand-alone Facebook search engine or for any anticipated future value for the company stemming from that.
Another problem with the Facebook valuation could be self-perpetuating. Bloomberg revealed last week that institutional investors are reluctant to invest in Facebook. There will be more than enough demand for Facebook shares, but they will inevitably come from “retail” investors who are much more fickle to buy and sell. This may become a volatile situation as premeditative Facebook founder Mark Zuckerberg holds 57% voting rights (this includes 28% rights for his shares as well as proxy voting rights from many other parties). Short-term investors may be a harder sell than optimistic IPO investors. Consider this statement (also from the most recent S-1 filing):
“Our culture also prioritizes our user engagement over short-term financial results, and we frequently make product decisions that may reduce our short-term revenue or profitability if we believe that the decisions are consistent with our mission and benefit the aggregate user experience and will thereby improve our financial performance over the long term.”
If short-term investors become impatient with Zuckerberg and Facebook’s long-term strategy, they may drive down Facebook’s share price inhibiting their capability to generate additional money through investment. Coupled with stagnant (if not dwindling) advertising revenue, Facebook users may be the last untapped revenue source for the company. In New Zealand, Facebook is currently beta-testing a feature that allows users to pay a fee to “highlight” their posts for greater reach in their network.
The many questions surrounding Facebook’s value should vet themselves later this week and throughout the coming months. For those not directly invested in the company, it should be of great interest how its stock valuation affects their direction. Canadians spend so much time on the social network behemoth, it will be interesting to see if the user experience changes significantly as Facebook tries to realize its potential under public scrutiny.