Facebook's Sequential Revenue Decline -- Or, Taking The Sense Out Of Seasonality
Much has been said about the amendment to Facebook’s S1 this week, but, for the Social Media Insider, it’s still not enough.
Something has been troubling me about the newly revealed numbers in the S1, and it has a name: seasonality. That means investors should expect ad revenue to go down between the Christmas-crazed fourth quarter every year and the first quarter. As you may have read, Facebook just posted a year-on-year quarterly increase in ad revenue of 37% – from $637 million to $872 million – but, as the amendment says, “advertising revenue for the first quarter of 2011 and 2012 declined 3% and 8% compared to the fourth quarters of 2010 and 2011.”
So what, you say? Well, here’s what. The reason this is troubling – or at least a demonstration that Facebook should not be compared to some Internet companies of yore – is that, in the early offing, hot Internet properties tend to see a steady supply of sequential increases in revenue, advertising and otherwise. Seasonality, if it takes effect at all, means smaller growth between the fourth and first quarters than the rest of the year, but no revenue declines from fourth to first quarters until a business becomes mature.
I looked up a few examples of the first two years of reporting from several Internet-related concerns to prove my point:
Google: Between the third quarter of 2004, and the fourth quarter of 2006, Google’s revenue went steadily, sequentially, upward, with no discernible pattern of seasonal dips. (Starting at $805 million for Q3 2004, by Q4 2006, Google posted revenue of $3.21 billion.) In fact, between the fourth quarter of 2005 and the first quarter of 2006, revenue actually went up more than it did between the first and second quarters of 2006.
Yahoo: From the first quarter of 1997 through the first quarter of 1999, the company saw nine sequential revenue increases in a row, going from $9.5 million up to $103.9 million. The revenue increase between the fourth and first quarters of 1997 and 1998 was a little off compared to the quarters on either side. But, notably, a year later the sequential increase in revenue – on a dollar basis – was actually larger between the fourth and first quarters than it was between the third and fourth.
Internet advertising in total: The IAB was the only entity tracking Internet advertising as a whole in the 1990s, so I thought it would be instructive to look at its spending totals for the category as well. Same trend. A February 1999 press release heralds the tenth consecutive quarter of growth – and, if memory serves me – that trend continued through at least early 2000.
There are many ways to interpret this. You could “blame” the numbers I’ve outlined above – particularly for Yahoo and the IAB industry-wide totals – as the byproduct of the irrational exuberance that took hold in the early days of the Internet. True. But the Google juggernaut came after that.
You could also attribute this to the fact that the Internet ad industry is now mature, and so companies that come into it at this stage can’t have the revenue expectations of their predecessors. But more recent IAB numbers show that seasonality is not a big damper on overall industry growth. While there was a dip between the fourth quarter of 2010 and the first quarter of 2011, it was small, from $7.45 billion to $7.3 billion -- a 2% decrease, as opposed to Facebook’s 3% decrease. First quarter 2012 IAB numbers aren’t in yet, but I suspect those figures won't see the 8% decline that Facebook did. (Yes, readers, I will revisit my prediction.)
My theory as to why Facebook may not be on the advertising juggernaut that many hope for is actually twofold:
1. Facebook’s advertising proposition is more difficult for advertisers to get their head around than Google’s, or the simple, lifted-from-print early ad model of Yahoo. At the very least, there’s a learning curve here that advertisers haven’t mastered.
2. Facebook confronts a universe of fragmentation that early Internet properties could only have fevered nightmares about. Per the IAB, mobile spending alone jumped by 149% between 2010 and 2011, from $600 million to $1.6 billion. As Facebook has only the smallest inklings of a mobile ad strategy, that’s $1 billion that Facebook, and many other properties, never had a chance of getting a piece of.
I won’t dole out investment advice, nor should you take it if I did. But, while I have a belief in the power of Facebook as a radical, world-changing communications platform, when it comes to revenue – particularly ad revenue – this is going to be a bumpier ride than some of you may have thought.