Ged Carroll

Facebook IPO postmortem

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This post is a collection of thoughts that I’ve had about the Facebook IPO, I realise that there may not be a cohesiveness to some of this but I wanted to put it all down in one place. In less than two months, Facebook has gone from being the technology sector darling to its typhoid Mary; what does this all mean?

One thing as a reader that you may want to bear in mind is that I have been pointing out flaws in the Facebook model since 2008 on this blog, I stand by the content that I put in those earlier posts.

I have broken this post down into five parts:

Factors that maybe influencing the Facebook IPO cynicism

How much is Facebook actually worth and did the Facebook IPO over, under or right price it?

Which is the billion-dollar question – whilst I couldn’t put some definitive value  on it there are some pointers that we can use to steer our thinking. Let’s notionally say that Facebook has already reached its first billion users, we know that the next billion will be worth substantially less than the first billion.Frédéric Filloux pointed out in The Guardian the following advertising  ARPU (average revenue per user) numbers:

Looking at those numbers, one could confidently say, if the numbers stayed the same, the overall ARPU would decline as growth is likely to occur in Asia and the rest of the world. It also tells us that there are a number of markets that Facebook isn’t currently seeing the full potential from. Once could imagine that Europe’s ARPU number could grow significantly, and a similar effect in the more developed markets of Asia: Korea, Japan, Hong Kong, Singapore.

Facebook could look at improving the efficiency and effectiveness of advertising platform by looking at new formats and finding ways to more effectively use data gathered from the likes of Facebook Connect and mobile applications. The company could also try and grow non-advertising parts of the business from its present 15% or so. Gaming is a huge online social activity for many people in Asia so  there is maybe more scope to grow.

I don’t think that China will be the next billion users, primarily because you have highly innovative competitors in the market already and Facebook has shown an unwillingness to bend to cultural norms such as forcing real world identity on Japanese web users. Secondly, an involvement in China would pose issues with US politicians who would use the opportunity to take a further look at the company. Whilst Facebook has stocked up on lobbyists at a commendably early opportunity compared to other technology peers it would still be unwelcome attention.

But on the face of it, none of this adds up to more than low multiples on current revenue streams, Facebook needs to reinvent other markets beyond online advertising whilst leveraging the advantage of its current user base.

What are you actually buying with the Facebook IPO?

So having looked at the current value of Facebook IPO at the time of its IPO, the rationale for 100 times earnings didn’t seem immediately apparent. Don’t get me wrong Facebook has a lot of accomplishments that make it a very valuable company, just not 100 times earnings kind of valuable.

To realise that value you would need to transform several markets, so does Facebook have the kind of qualities that would allow it to do so?

So the real question is ‘Do you feel lucky, well do you punk?

How might the Facebook IPO debacle adversely affect Facebook beyond the class-action law suit and likely SEC investigation?

I suspect that the main negative impacts if they were to occur would be in sales and engineering. Firstly sales, the teams would have to earn their money dealing with the FUD (fear, uncertainty and doubt) that the IPO threw up around the efficiency and effectiveness of their current products. Now that the quiet period is over, the company can go public on the premium inventory it has and start to answer concerns directly in the media as well as verbal briefings via account managers. The impact won’t be too severe if Facebook can change the game (like it has done by moving to a CPM measure for new formats) successfully or arrest the decline in click-through rates.

In common with other technology companies Facebook depends on being able to get the best engineering and sales talent to work for them and stay with them. This is usually done through the use of share options and giving shares themselves to engineers. The attractiveness of these offers depends on the share price continuing to rise. Now with engineers it often isn’t just about the money, but also about the kind of challenge that engineers can embrace, a good example of this would be some of Spencer Tipping’s reasons for leaving Google. But whichever way look at it money is important.

Share options buy homes, pay off college loans and pay for important life events like weddings. Shares are important for future talent acquisition and existing talent retention, so this is where there maybe more of an impact, depending on if there was a continued decline, what the vested share price for the employee, how many options they have and what their lock-in period is.

The Facebook IPO and those that have gone before

Much of the analysis has compared Facebook to Google or Amazon but I think that the comparisons are inaccurate and misleading for a number of reasons. Facebook compared to:

I personally think that if you buy into Facebook’s future promise, Facebook looks more like Xerox. In the 1950s, the Northeastern US was the Silicon Valley of its day; with engineering and chemical factories around New Jersey and the Boston corridor through to New York being the home of the infant computer industry. Xerox was founded as a photographic supplies company that made equipment to develop photographic film, it eventually incubated its killer product –  xerography  which begat photocopiers and fax machines after a decades worth of work. Later on in the development period, the company invested in an insurance company to provide cash flow for future model developments. If you believe that Facebook has a bright future ahead of it, then by implication, it’s current and immediate future products like premium ads in the news feed look more like cash generative businesses to fund ‘project X’ whatever that turns out to be.

More information

The Facebook | Instagram post – renaissance chambara
Facebook: the collective hallucination | guardian.co.uk
why I left google – Spencer Tipping
Zynga IPO and thoughts – renaissance chambara
The Facebook IPO post – renaissance chambara
US shares skid as Facebook IPO stumbles
Facebook debut disappoints
Facebook Breaks Another Record: Volume – WSJ
Facebook IPO Post-Mortem – The Atlantic
Facebook’s Debut Marred by Trading Flaws – NYTimes.com
Ed Cotton: Facebook’s Dangerous Game @PSFK
Facebook’s Real Problem in Just 44 Words
Zynga Shares Jump On Facebook IPO Connection | TIME.com
What Facebook isn’t telling you about its risky ad business | VentureBeat
Analysis: A sobering look at Facebook | Reuters
Here’s The Real Problem For Facebook’s Stock Valuation
Is Facebook peaking in the US? – FT.com
Why Facebook is a dead man walking
Why Facebook is a dead man walking part II?
Why Facebook is a dead man walking part 2.5?
Risk Reduction Strategies on Facebook – danah boyd
Teens Find Innovative Ways to Control Their Facebook Presence – All Facebook
On Facebook deactivations – Jillian C. York
Is Facebook peaking in the US? – FT.com
Facebook (Kinda) Disputes Slowdown Estimates, But Declines to Give Actual Stats – AllThingsD
Facebook Is Losing Users In The Countries Where It Took Off First
If growth in the US is flatlining then where is Facebook’s growth going to come from? « excapite
Report: Facebook Grew Only 1.7 Percent in May, Dragged Down By Losses in Oldest Markets – AllThingsD
Has Facebook Peaked? | WebProNews
Thoughts on Facebook’s apparent decline in the developed world
Facebook, privacy and consumer behaviour
Facebook fatigue