Facebook's missing 'pop'

The social network's modest start to life as a public company will leave some disappointed but Mark Zuckerberg shouldn't be too worried.

Business Spectator

Facebook’s IPO probably failed to 'pop' overnight like those of LinkedIn and Groupon not just because it faces serious questions about its long-term profitability, but because of the sheer size of its float.

Shares in the social network finished their debut session at $US38.37, a very modest 0.97 per cent higher than the $US38.00 offer price. It gives the social network a market cap of $US104.23 billion, making it the 24th largest corporation in the US.

Analysts were expecting Facebook to receive a bump of 5-10 per cent, a prediction inspired largely by the IPO being 25 times oversubscribed. However, the larger floats tend to be less volatile and Facebook was the second largest in US history.

Founder and chief executive Mark Zuckerberg, who rang the NASDAQ bell this morning outside the social network’s headquarters in Menlo Park, California, can to some extent be thankful that the float went as it did. That’s because things got off to a rocky start.

Trading in Facebook shares was expected to start at 11am (EST), but NASDAQ delayed the starter’s gun by half an hour due to technical issues. Some major market movers were apparently unable to change or cancel orders.

At around 11:30am the shares first changed hands at $US42.05, an almost 11 per cent premium to the $US38 IPO price. Optimism ebbed and flowed as the stock quickly sank to $US38.01, then rose again towards $US41.70, only to fall back to its final price not far above the $US38 offer.

While the headlines say Facebook raised $US16 billion from the float, the social network itself will receive a more modest $US6.8 billion, with the remaining $US9.2 billion going to pre-float shareholders.

A much greater percentage of Facebook’s investors have sold than we saw during the floats of Google, Yahoo and LinkedIn. Understandably, this creates the impression that insiders are cashing out while the going is good.

However, venture capitalists and hedge funds will always want to sell out if there’s a handy profit on offer, particularly in times of trouble. It should be remembered that unlike countless other IPO plans that have been shelved since the US subprime mortgage crisis put global markets on a path of acute and intermittent volatility, Zuckerberg has launched Facebook onto the NASDAQ with commentaries being written daily about the inevitable break-up of the eurozone.

Facebook defies this pessimism with its two biggest drawcards – growth and user engagement. The social network’s unstoppable rise towards one billion users and beyond, along with enormous amount of time those users spend ‘Facebooking’ – as opposed to ‘Google-plussing’ or ‘LinkedIning’ – has given speculators an opportunity too good to pass up – even as Europe burns.

But of course the biggest challenge for Facebook is not its debut or Europe. Zuckerberg’s company might be ranked 24th in the US by market cap, but there are 908 companies in America that collect more revenue. Now that the company is public there will be much greater scrutiny on how Zuckerberg spends cash, including that $US6.8 billion, to bridge the gap between Facebook’s future promise and its current profits.

The worry is that Facebook will need to encourage advertising that’s more intrusive to the users' experience or privacy (or both) in order to collect enough cash to justify valuations anywhere near the company’s current level. All of this at a time when Facebook’s users are already suspicious of social media advertising.

Just this week, independent digital marketing agency Greenlight released research indicating that 30 per cent of Facebook’s users strongly distrust its use of personal information. Google has trust issues as well, but the search engine’s users click on its ads enough to keep the advertisers coming back again and again. Rather worryingly, the Greenlight survey indicates that 44 per cent of Facebook users claim they “never” click on a Facebook ad.

A better known Facebook development this week was the decision by General Motors to stop advertising on the social network. This is a perfect collision between a traditional US manufacturing giant experimenting with new advertising channels and America’s newest tech superstar shaping those channels. We’ll know in years to come whether the fact that Facebook bumped GM from number two spot on the list of America’s largest IPOs will ultimately be reflective of their respective fortunes.

Reports indicate that GM executives believe Google’s AdSense is a more efficient way of getting clicks than any paid product Facebook can currently offer. That it is, at the moment. Eight years ago, Google launched onto the NASDAQ only to meet powerful scepticism that search could ever generate long-term growth and profits. It seems silly now, but that’s what the conversation was like.

However, GM is America’s third-largest advertiser, so its absence from Facebook is concerning. It should also be noted that the carmaker might have its eye on Facebook’s horizon, and the way users are changing the way they view the social network.

Facebook conceded in its S-1 filing to the US Securities Exchange Commission that an increasing proportion of its traffic is coming from mobile phones. But its advertising revenue from mobile impressions is effectively non-existent.

Facebook’s growing mobile presence will cannibalise its already fragile advertising numbers from PC impressions unless it can find a way to make mobile advertising less disruptive. Given that the screen is so much smaller than a PC or laptop that is an almighty challenge. Can you imagine making a social media ad for a car that’s capable of being viewed on a hands-free device?

Alternatively, Facebook could find an alternative revenue stream to advertising – although the fact that Google is still beholden to search advertising, despite serious attempts to diversify, should demonstrate the enormity of that challenge.

Much of Facebook’s future appears as up in the air as its share price. To maintain its $US100 billion valuation, Facebook will have to generate enough belief that its juvenile business model will mature as sceptics and short sellers emerge.

Along the way some compelling arguments against its model and GM-style hiccups will ensure that, whichever way the share price goes, it’s going to be a bumpy ride.

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