Facebook’s success as a $100 billion public company hinges on monetizing its measurable, social platform with inventive content, service access and transactions to triple its annual revenues to about $15 billion within five years.
Despite its meteoric growth, Facebook is in the early stages of forging that new growth in an intense market place where a competitor such as Google (with 10-times its revenues and profits) is leveraging its stranglehold on online advertising, search and its own connected ecosystem.
But if generating new revenues from connections depends on an engaged audience, than Facebook already has the edge. Facebook users spent an average 53 minutes every day on the social network site, compared with an average 13 minutes of daily engagement in the US and 20 minutes of daily engagement globally by Internet users in general, according to Michael Pachter, analyst for Wedbush Securities’ Private Shares Group.
Facebook can leverage the explosive adoption of connected mobile devices throughout the world with its sticky connections: the 2.7 billion daily “likes” and “comments” that its users share about events, products and services, all of which can be monetized.
Today, Facebook generates only a measly $4.75 annually per each of its 800 million-plus active users—a negligible part of its $4.27 billion in 2011 revenues. Roughly $650 million, or 12% of total revenues, is generated by Zynga and other social games. The lion’s share, or $3.8 billion of its total $4.27 billion in 2011 revenue, comes from its nascent advertising business, income from which has been decelerating. Overall, Facebook barely broke even last year with $1.5 billion in operating profit.
Pachter estimates Facebook must generate at least 80 cents per month from 1.35 billion users, while growing ad sales as much as 18% annually, to generate the $13 billion to $16 billion in yearly revenues to justify a $100 billion public valuation. The lofty valuation is not supported by Facebook’s current financials or trends, Pachter says.
Within the next five years , Facebook should generate as much as $2 billion in annual revenues from trading Facebook credits (now about $470 million), up to $2 billion in e-commerce income, as much as $6 billion in advertising, and up to $6 billion annually in search and other miscellaneous business, which represents the single biggest growth opportunity.
Simply pursuing a bigger chunk of the $70 billion global advertising market won’t cut it. Facebook must invent new forms of sharing and transacting that encourage users to trade their privacy concerns for convenience and relevance. If Facebook can manage its innovation and operations well enough to become the Internet’s de facto operating system, it can siphon portions of key revenues from Google, Microsoft and even Amazon--particularly if it aggressively pursues a connected mobile payments strategy.
Facebook will not be alone if you believe the prediction of Yuri Milner, a major Facebook investor and co-founder of mail.u group: Over the next decade, 25 companies each with a $25 billion market cap and 50 companies each with a $10 billion market cap will emerge in the connected consumer Internet space. None of them are on the radar screen today.
Remaining nimble and daring enough to outpace smart upstarts may be Facebook’s second biggest challenge. The past decade is littered with smart Internet companies with amazing new value propositions and inflated valuations that crashed and burned. AOL the starkest reminder having created and as quickly destroyed $250 billion in value out of the disastrous merger with Time Warner.
As one of CNBC’s “Fast Money” contributors observed, “Facebook, the publicly traded stock, will get a lot of rope to hang itself.”
To realize the promise of its $100 billion valuation, Facebook must maintain what Zuckerberg in the S-1 calls “The Hacker Way:” the continuous improvement and iteration of a company as it scales technology, its infrastructure and open platform leveraging the connections it facilitates among everyone in the world. Here are some ideas that should translate into:
--Create reliable, easy forms of measureable ROI and new data metrics—doing for social what Apple’s iPhone and iPad did for mobile connectivity.
--Devise ways to transform “like,” comments and other forms of sharing into hearty revenue streams. Traffic is money in a connected world.
--Devise a safe universal identity bank off of which users and consumers can leverage access and transactions of all kinds in all places. Mining while safeguarding personal data would be a breakthrough.
--Recreate the user experience for mobile-connected devices and forge the mobile payment process.
--Reinvent connected advertising and marketing well beyond the simplistic branded Facebook pages and display ads. Users/consumers become the ad channels while making targeted data points golden.
--Shape social gaming as well as virtual goods into a more real-life, real-time, revenue streams. Leverage Zynga’s social gaming hub into something bigger. Social gaming is expected to morph into an $8.6 billion business by 2014, and virtual goods are expected to double to a $15 billion business by 2015, according to the Facebook filing.
--Create a new universal gateway to paid and free streaming video.