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Why Facebook's IPO changes things for everyone

After the unprecedented hype came the lukewarm debut. The initial public offer (IPO), priced at $38 a share, values Facebook, the cult social networking platform which has chan.ged the rules of keeping in touch forever, at a staggering $104 billion

May 25, 2012 / 01:34 PM IST

After the unprecedented hype came the lukewarm debut. The initial public offer (IPO), priced at USD 38 a share, values Facebook, the cult social networking platform which has changed the rules of keeping in touch forever, at a staggering USD 104 billion. This makes it the largest IPO for a US tech company and the first in that country to go public with a USD 100 billion plus valuation.

For months and weeks now, analysts have been poring over what an IPO would mean not just for the company but also its iconic founder, the 28-year-old Mark Zuckerberg, who dreamt of building a company which makes money for quality products and not vice versa. For Facebook, the IPO will change things forever, amid hopes that the company will be able to withstand the pressures a listing will naturally bring.

So what is likely to change on the ground for Facebook as investors trade its stocks every day? As seen on its listing debut, not everyone is as enthusiastic about the company’s fortunes, given that the company’s stock hovered just around its issue price at the end of its first trading day on 18 May.

So far Facebook has managed to do well, but now that investors will be watching it ever so closely.AP

There are those that feel that Facebook (2011 profits of USD 1 billion on revenues of USD 3.7 billion) will, going forward, face challenges in generating revenues in a world which has seen several other tech titans generating enormous hype and then failing to live up to expectations. So far Facebook has managed to do well, but now that investors will be watching it ever so closely. The company, known for its constant ability to innovate and remain ahead of the curve, will be under pressure to prove itself.

Rather ominously, The Economist points out in its 12 May issue that social networking's brief history already has examples where one-time high flyers were unceremoniously dumped after they failed to live up to expectations of users, despite having built up considerable content on such sites.

The examples cited by The Economist are of Friendster and MySpace. For Facebook, whose biggest proposition thus far, in particular in countries like India, is that its basic services are free, the biggest challenge would be to strike that important balance between keeping users engaged without charging them, and yet generating revenue for the company and its investors through advertising, applications and other channels. How effectively Facebook is able to strike this balance is going to determine whether investors remain bullish on the stock.

So far, Facebook's users have stuck to it, and have been growing phenomenally. In the first quarter of 2012, it had 901 million average monthly users, and 58 percent of them used Facebook daily in March, notes The Economist. And the article says frequent users are most likely to click on ads and gaming applications. However, Facebook is still not essentially about advertising and gaming as about connecting with others and sharing content for free. Its ad revenues, in fact, dipped in the first quarter of this year, from the last quarter of 2011 and average revenue per user has also slowed in growth at above 6 percent.

With mobile usage set to dominate internet-based offerings, Facebook will also have to develop cutting edge offerings in that space. So far, that has not happened and The Economist  says though the company has 500 million mobile users, its mobile apps are still reflective of a personal computer kind of framework, not cutting edge enough. The $1 billion acquisition just before the IPO of mobile photo sharing company Instagram by Facebook is ostensibly aimed at addressing this problem.

An article inTheWall Street Journal, on the other hand, notes how Facebook has been experimenting with other revenue-generating models which may leave users puzzled. Apart from unveiling a paid app store a la Apple, Facebook recently began an experiment in New Zealand, charging two NZ dollars a post for users to ensure their friends see what they write. The WSJ article says the service, called Highlight, in fact goes against the grain of what Facebook stands for "free and always will be". The article also quotes a NZ Facebook user as saying it was doubtful whether what she posted would ever be important enough for her to want to pay two dollars for it. That could be the thinking of many others if Facebook began charging for services like this.

That things will not be easy for a post-IPO Facebook is evident. Even as it grapples with the pressures of coming up with new sources of revenue without aggravating users who could then turn out to be fickle, General Motors Co has already said that it was cancelling its paid advertising on the site.

In addition, a recent Reuters report quotes Global Equities analyst Trip Chowdhry as saying  the stock debut was "lacklustre" because Facebook’s growth prospects do not justify a high stock valuation. “They have serious technology and business model problems. Facebook is overhyped and drinking its own Kool-Aid," he was quoted as saying. "They are only getting USD 4.39 per user per year. Google gets almost USD 30 per user."

And so, while Facebook begins its long journey in the markets after an iffy debut last week, the spotlight will firmly be on Mark Zuckerberg and the phenomenon he created called Facebook. Going forward, Facebook will have to monetise existing and new services effectively to generate revenues and keep investors interested.

Whether he can succeed in keeping his millions of users happy and their numbers growing, together with a growing bottomline, will determine whether one of the world's greatest entrepreneurs and innovators is able to survive the ultimate test: that of sustaining a pathbreaking business which changed the world.

About the author:
Sourav Majumdar has been a financial journalist for over 18 years. He has worked with leading business newspapers and covered the corporate sector and financial markets. He is based in Mumbai.

first published: May 24, 2012 05:36 pm

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