By Peter Lindfield, published in the Telegraph-Journal 22nd May 2012
Facebook is the world’s newest $100-billion company. Its recent and much-anticipated initial public offering (IPO) set off a barrage of coverage in the media and across the Internet about whether Facebook could live up to expectations. With the frenzy over, analysts are questioning how Facebook will demonstrate it can generate the profit to sustain this valuation.
The social network company will be under a high-resolution microscope for some time.
Even though there was no difficulty meeting the IPO share price target of US$38, there remains doubt among some investors that the Facebook momentum can be sustained or even that social media is a viable advertising platform. The success metric that Facebook relied on heavily before the IPO was the size of its user base, but other, more monetary measures of the newly public company are now being applied.
Other investors have voiced concerns about how risky an asset Facebook may become in the near term, citing its high price-to-earnings ratio and its reliance on an extremely limited number of revenue sources and the vague connection between revenue growth and operating and capital expense growth.
Concern has emerged about how it plans to establish a foothold in emerging markets such as China, and for capitalizing on smart-phone and tablet users. There is unease that changes to the business model may have a negative effect on its current user base. Will users maintain loyalty to Facebook when more advertising and more intrusive commercialization is integrated into the system?
In much the same way that MySpace and other social network platforms fell to Facebook, there are questions about how much of Facebook is actually defensible, from intellectual property or technical perspectives. Could Facebook lose elements of its current user base to new players? And most fundamentally, will Facebook ever be considered an effective use of advertising or marketing dollars by enough companies to meet its target revenue numbers?
All of this suggests that markets could react negatively to future clues that Facebook may not be achieving traction on revenues, profit or earnings targets. The many challenges that will confront Facebook in the near term place a greater emphasis on the company leveraging some of its cash for acquisitions that will help it solve some of its most pressing problems.
To help Facebook to increase its revenues from its mobile products, it will seek mobile and social technology companies. Acquiring firms focused on creating social media advertising will also be a high priority. Whether there are sufficient advertising budgets remains to be seen. And if its recent acquisition of social photography startup Instagram – for an eye-popping $1 billion in cash and stock – is any indication, Facebook can be expected to sweep the horizon for companies with a loyal following to add to its user base.
Despite the hurdles that Facebook will need to overcome to justify its staggering valuation, it has proven that social media is now at the core of the Internet. Even from the beginning, Facebook and other social networking systems such as Twitter and YouTube have been an important part of the transformation to the hyper-connected world. Facebook has become part of a network fabric that includes platforms such as telephone, email, instant messaging and face-to-face communications. These platforms emphasize information sharing, user-centred design and collaboration, which in turn have created enormous and steadily increasing bandwidth demand.
Perhaps the most important implication of Facebook’s rise to prominence is that it has begun to validate the legitimacy of social networking as a commercial force as well as a social one. When we view Facebook’s past and future from this vantage point, it clearly can be seen as an important pioneer in a larger movement.