Facebook’s Initial Public Offering

By changing their privacy setting to public, Facebook might cause users to do the reverse.


Facebook ‘going public’ has set off another round of accolades and scepticism about the viability of the company. As the largest internet-company IPO to date, the market value of what Facebook does (accounts sway from making the world a happier place to selling your soul to advertisers) will be much more readily available, and the company will be much more open to the sort of scrutiny that causes companies to lose all of their value in a day: Bloomberg have already published an article pointing out the lack of any women and the vast majority of white men on the firm’s board.

Facebook has some impressive numbers. It counts itself has having 845 million Monthly Active Users. It took 3.7 billion dollars in revenue in 2011, and that was an increase of 88% over the previous year. Profit, as Dragon’s Den has told us, beats turnover and Facebook’s profit for 2011 was (a surprisingly precise, after-tax) $1bn.

Break these down and Facebook has some apparent problems. 845m users, generated 3.7bn in revenue for a grand-total revenue-per-user-per-year of $4.37. The profit number is also rather shaky on a per-user basis, coming in at $1.18 after tax. So Facebook does the internet version of “stack ’em high, sell ’em cheap”, with advertising driving the vast majority of revenue. Still, a billion dollars is a billion dollars and at least Facebook’s costs are low enough to make the profit margin 45% before tax. For comparison, World of Warcraft / Call of Duty owner Activision Blizzard had roughly 10% in 2010, LinkedIn 7% and Tesco’s languishes around 5% (both 2011).

The financials may not imply a company quite as valuable as the $100bn that has been bandied around, or even the $80bn implied by the IPO. A primary concern is the dependency on advertising revenue. Would-be advertisers can do one of two things on Facebook – pay Facebook to let them target users with the annoying and easily ignored sidebar adverts, or set up their own fan page for free and abuse Facebook’s own network effects (its apparent main selling point for the first kind of advertising) to let users sell to their friends by ‘liking’ it. As firms become more Facebook-savvy themselves, they could find it cheaper to use their own fan page, managed in-house, rather than let Facebook do the dirty work. The impact on users could be dramatic – either Facebook cuts its targeted ad prices or tries to increase the value of user information by letting advertisers harvest more and yet more of the user data to be even more precise. With little effort you can already target people who ‘like’ specific pages or other objects, and exactly how far Facebook is willing to take this release of data (some argue it is already too open) and how widely this release is advertised (not widely enough) will determine whether users accept the intrusion or decide to clam up.

Different users clearly have different advertising values attached to them, and those already highly entwined to Facebook (perhaps the most valuable) are probably also least likely to terminate their accounts. Thus, Facebook might see a drop in revenue growth, or a drop in users. It may be the largest internet IPO of all time, but questions over the viability and adaptability of the business model loom over the future of the company.

 

If you enjoy Facebook’s sense of irony in using the timeline for its own history, or just like financial data, the full text of the filing is most easily accessed here: Facebook S-1

 

Alastair Irvine

Image Credit : Wikimedia

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