The Big Facebook IPO, Instagram and Google
Facebook is about to enter the big leagues. It was already big. 900 million big. But now it’s standing at the cusp of something that could propel it into the same domain as the mega corporations. The ubiquitous super companies that have somehow woven themselves into the fabric of modern culture. McDonalds, Coca Cola, Apple etc. Ones that retain their value even if markets are down.
We all knew this anyway but they’ve finally decided to convert all those users into money. Or paper money at least. Though reports that the move will create “thousands of millionaires” (attributed to a Reuters report from last December) may be wide of the mark, California is probably going to see a few more Ferraris on the roads in the coming months.
There’s no hiding from the fact that this is ranks amongst one of the significant commercial events in internet history. Back in 2006, no one could have imagined that a new social media platform (and by no means the first, see Faceparty/Myspace/etc) introduced mainly for use for college students could grow into one of the largest and most influential companies on Earth, let alone the internet.
Here’s a look at Facebook’s membership figures up to and including March;
Facebook's growth in members up to and including March 2012
No sooner than this was announced however, did the critics come out in force with mutterings of “THIS IS THE END OF FACEBOOK” and that we’re just going through a second dot com bubble. The sums being banded around have certainly been eye watering. Mr Zuckerberg is reportedly planning on putting 10% of the company for public offering at around $10 billion dollars – that values the company at $100 billion. The ‘other’ internet giant, Google, only (I use ‘only’ very loosely) floated for a value of $23 billion with an initial offering to the public at $1.9 billion. Though Google is now standing at a cool $187 billion, Facebook’s valuation before it’s even publicly traded is a sum that is causing quite a stir.
Some will argue that the trouble begins here. Becoming a publicly traded company means that quarterly margins are now the priority. With Google, this meant diverting its attention away from what it did best (that’s being a search engine) and branching into other ways of boosting those performances. Shareholders, quite rightly, focus on short term profits over long term development. That’s just the nature of a publicly traded company.
The problem is, when you offer an IPO for a company who has already monopolised the one thing it’s the best at, then the most obvious way to increase your profits is to branch out to other, untested markets. Google’s largest and most reliable source of income has always been Google Adwords, which in 2011 brought in around 90-95% of the company’s entire revenue stream. So far it’s working – due mostly to the huge market share that Google still has in the search engine sector (66.4%, whilst Microsoft’s Bing lingers on 15.1% and the ever decreasing Yahoo at 13.8%). This drives the massive amount of revenue that search advertising brings.
However it may not be a huge surprise that since 2004, Google has put a lot of energy and resources into developing apps, features and social media networks in order to diversify the services that they offer. Some have been successful and some less so. Orkut, Sidewiki, Googlewave are all examples of Google products that either never reached their full potential or crashed and burned way before their predicted sell by date. The jury is still out on Google Plus but it saw a late surge in membership late 2011 (though this will have something to do with Gmail users automatically getting a Google Plus account now) and has since opened up its virtual doors to teenagers, with user numbers expected to hit 400 million late this year. What Google Plus does well though, is aggregate a whole load of high quality personal and geolocational data. There’s no prizes for guessing what that will end up being used for. Google have really pushed emphasis on Google Plus as an overall experience of the web rather than just a social site. This drives SEO and online advertising into the social realm with more emphasis and weight placed on content recommended and propagated through social media profiles, i.e. trusted sources. Whether this works out or not will depend on Google Plus taking off – if it does, then it could potentially drive an increase of high quality unique content on the web (or at least its visibility) as a whole whilst also increasing the data available for its own targeted advertising. All in all, it’s a pretty good plan – anyone who uses the internet uses Google. They can pretty much do as they like.
Facebook, Mobile Advertising and Instagram
So what’s the difference between Facebook and Google?
Well aside from being at different stages in their life cycle, Google went public at a time when the internet bubble bursting still felt like yesterday for a lot for people. In 2004, many investors were still picking up the pieces of their toxic investments. The AOL/Time Warner fiasco still fresh in peoples’ memories and though the market had picked up, it was a lot closer to a bottom than we are to one now.
Facebook certainly have a lot to live up to in order to please both its consumers and its future investors. A value of $100 billion is one that is inflated somewhat by hype and optimism for social media. Following dot com disaster 1.0, there is a tangible fear that the initial rush to buy flavour-of-the-week stock will result in a rapid peaking in share value from public investors that know enough about Facebook to want to invest, but not enough about long term business plans to see the bigger picture. Google rose and rose, and continues to do so due to its dominance within the search engine market – this drives the advertising revenue. Facebook however, has a lot more competition now and its growth has slowed since those heady early days. Though it has 900 million members, the question is whether or not it can fully monetize the majority of those members. Facebook, like Google, earns vast amounts through targeted advertising – In fact its annual turnover for ad revenue by the end of last year was around 3.15 billion dollars – which like Google, accounts for around 95% of total revenue for the company. Though where Google still has plenty of room to continue growing its principal service, Facebook is unanimously tipped to slow down.
Facebook's growth is predicted to fall whilst Google goes back in front as the main advertising breadwinner
As I mentioned in a previous blog post about social media stats, Facebook’s rapid growth has slowed somewhat and has seen some of its dedicated market supplanted by Twitter and more niche sites such as Linkedin. No one can really tell definitively just how much potential Facebook has in expanding its base market, but it’s unlikely to see exponentially rising figures like it has up to this point.
Which brings us on to Instagram. The buyout of Instagram was met with surprise to say the least. The amount at which it was bought out at was met with even more surprise. People quite rightly wondered why Zuckerberg felt the need to buy outright a company that poses no threat to Facebook’s current market share and more to the point, why he wanted to pay a billion dollars – for what is essentially a company that, as of yet, has no revenue stream (the billion dollars, it must be noted, was paid in $300 million cash and 23 million shares of $31 each).
The answer may be simple enough; Zuckerberg has big plans for Facebook’s mobile presence…
Growth and usership figures for smartphones in the US - i.e. all potential internet access points
Along with last year’s financial summary, Facebook released this statement regarding their position on mobile advertising;
Mobile Advertising. The global mobile advertising market was $1.5 billion in 2010 and is expected to grow at a 64% compound annual rate to $17.6 billion in 2015 according to an industry source. According to a third-party report published in September 2010, the Facebook app is the most frequently downloaded app across all major smartphone platforms in the United States. We had more than 425 million MAUs who used Facebook mobile products in December 2011. We currently do not show ads or directly generate any meaningful revenue from users accessing Facebook through our mobile products, but we believe that we may have potential future monetization opportunities such as the inclusion of sponsored stories in users’ mobile News Feeds.
Oh how very interesting!
Well Zuckerberg’s baby is doing alright for the first quarter of this year, even though total advertising revenue fell from its 2011 Q4 figures;
Facebook's quarterly financial details. Less than December but far more than this time last year
At the moment, users can simply bypass Facebook if they wish and share on Twitter or Instagram’s own platform. Even though he has already issued a statement saying “We plan on keeping features like the ability to post to other social networks” via his blog post that announced the acquisition, it’s hard to believe that in change in ownership won’t be leveraged to benefit Facebook over Twitter in some way. What may shed more light on this deal, and indeed Facebook’s future intentions is the fact that currently, around 33% of the US population (106.7 million people) own smartphones with direct internet access. A huge number of these will be Instagram users. More to the point, a lot of these Instagram users will also be Facebook users. That 33% is predicted to grow to 45.6% (148.6 million people) and considering Facebook have yet to advertise to any of their mobile patrons, that is potentially a very large slice of advertising revenue that could be heading to Facebook’s coffers.
Whether that dip in advertising revenue for Q1 of 2012 is a sign of things to come or an insignificant anomaly, shareholders are going to want to see an improvement in any case. The smartphone advertising market is still very young and this could be Facebook’s moment to monopolise mobile ads before someone else gets a foothold.
Of course this is all speculation. All one can do is analyse current trends and apply it to what these guys are doing. But in no uncertain terms, Facebook have a plan. At the end of that plan, Zuckerberg hopes to find a pot of gold… Resulting in a successful IPO, happy investors and continued growth. All is hunky dory.
What could go wrong? Right?
Source list for figures used in this blog post: