Facebook figures belie potential rocky road ahead
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Shares in the social networking giant Facebook did a roaring trade when the company floated on New York’s Nasdaq stock exchange on Friday but there may be choppier waters on the horizon for co-founder Mark Zuckerberg and company.
No one can deny the figures look incredibly rosy.
On Friday social networking site Facebook was due to raise a mammoth $18 billion on the Nasdaq stock exchange.
With the initial stock price set at $38 a share the social media giant was initially valued at around $104 billion at its initial public offering (IPO) making it the third largest flotation in US history.
The share price has been predicted to rise to as much as $56 dollars in the coming days meaning the value of Facebook could yet increase.
Company profits for 2011 hit $1 billion.
It all means extremely good news for those investors, including U2’s frontman Bono, who were persuaded to buy a stake in the web phenomenon, co-founded only eight years ago by Mark Zuckerberg.
But as the bubble continues inflating, the danger grows that it could one day burst and go the way of its predecessors like MySpace and Netscape which sprung up in the first dot-com boom.
A taste for advertising
Facebook’s continuing success, at least from an investor’s point of view, could depend on whether it can rake in enough money through advertising without alienating its millions of loyal users.
In a potentially ominous sign, US automobile giant General Motors announced to a fair amount of consternation, just days before the flotation, that it was pulling its advertisements off Facebook. GM claimed the adverts were simply not having the desired impact.
Facebook makes an estimated 85 percent of its revenue through advertising. So when one of the world’s largest advertisers, which has spent $10 million on Facebook, says it is not worth it, those in the Facebook boardroom could be forgiven for acting a little twitchy.
"The pullout by General Motors cannot be ignored," Joshua Raymond, chief market analyst at London’s City Index, told France 24. "People have a lower propensity to click on an advert if they are in a social frame of mind, that’s essentially what General Motors realised."
A recent survey by marketing analysts World Stream appeared to back his point. Their study revealed people were 10 times less likely to click on a Facebook ad than one on Google.
This problem has not been lost on Zuckerberg himself, who has said in the past that he does not want advertising to ruin Facebook.
"Facebook was not originally created to be a company. It was built to accomplish a social mission,” Zuckerberg said.
Market analyst Nate Elliot, of the global research firm Forrester, thinks Facebook’s chances of putting a smile on the faces of its investors could be scuppered by the site’s founder.
"We doubt Zuckerberg's going to wake up any day soon having acquired a taste for advertising, or even a proper understanding of it," he wrote in his blog.
To really make money, analysts believe Zuckerberg and his colleagues will have to wake up to the world of mobile advertising.
Around 488 million people use Facebook on a mobile phone, more than half of its members worldwide, but advertising has not yet been adapted to the devices.
"Last time I checked, mobile phones had really small screens," said Michael Pachter of Wedbush Securities.
James Ashton, London’s Evening Standard’s city editor, believes the biggest danger could come not from too little advertising but from too much.
"The big question is, can they fully commercialise their website without the users being turned off? How intrusive can the marketing messages be before logging becomes a chore and not a pleasure?" Ashton told France 24.
D.E. Wittkower, editor of the book ‘Facebook and Philosophy’ issued a starker warning for Zuckerberg and co in his Wall Street Journal blog on Thursday.
"Push us too far and we will break you or abandon you," he wrote.
Holding on to its market share
Facebook may be the daddy of the social media world but with several young upstarts growing fast there is no guarantee it will remain top dog.
On the same week Facebook floated, another social media site, Pinterest was valued at $1.5 billon, which represents a five-fold leap since October 2011.
It might not be a real threat to Facebook but with Twitter, Google Plus and established sites such as LinkedIn there are plenty of options out there if Facebook users ever get tired of changing their profiles.
“If there is a threat to Facebook then it will come from lots of smaller social network sites which will attract people away from it to the point where it’s no longer popular," Eric Olander, France 24’s digital media editor said.
"There’s only so much time in a day that people can spend on social network sites," he added.
Bubble safe for now
Those who doubt Facebook, however, would be wise to look at Google’s relentless rise. Its IPO value was only a fifth of Facebook’s in 2004 but its worth has increased seven-fold to around $200 billion.
On top of that, Facebook has over 900 million loyal users worldwide and with the number rising all the time it is soon expected to crash through the billion mark.
Those millions do not look ready to turn their backs on the site yet and many of those who have dared to close their Facebook accounts came rushing back because they felt detached from their online social circle.
Despite the potential dangers that lie ahead, the Facebook rollercoaster looks unlikely to come off the rails anytime soon, as much still stands in its favour.
"Around 44 percent of Facebook users log onto the site six days out of seven, » which represents incredible stickiness," City Index’s Raymond told FRANCE 24. "It is here to stay for now. It is a bubble like all these things but Facebook still has a long way to go."