Facebook's public offering and economic promise look more than ever like a leap of faith, constricted by nagging concerns about whether it can monetize exploding mobile device use with new social search, advertising and commerce models.
Facebook strongly warned about the adverse impact this great unknown could have on its financial results in its securities filings before going public last week. Even more adamant trepidation privately expressed by Facebook executives prompted its lead underwriters --Morgan Stanley, Goldman Sachs and JP Morgan -- to cut their 2012 revenue forecasts from just over $5 billion to about $4.8 billion during the IPO road show, tipping off only some of their biggest investor clients.
That ethics fiasco and the ineffectiveness of the underwriting process now overshadow the most critical issue: How Facebook can leverage 900 million users (one in every seven people on the planet) to crack the social mobile commerce code?
The IPO fallout is being compounded by the holes in Facebook's strategic growth prospects. Facebook lacks a proven method of utilizing its detailed user social graphs to create a social-mobile-profits-driven ad model at a time when its ad expenditures fell 6% in the most recent quarter.
All of the top 100 brands have FB relationships generating close to $90 billion in annual advertising revenues, or about 82% of its total income. General Motor's abrupt decision to cut its $10 million ad budget for the social network just before it went public didn't help.
Facebook's enterprising efforts to lure advertisers to its social fold can't come fast enough but, remarkably, too often exclude mobile platforms or inventory. For instance, Facebook's latest efforts to provide advertisers with more premium ads on individual user home pages and news feeds through third-party providers, such as TBG Digital and AdParlor, according to Business Insider.
While ad dollars have declined, payment revenues have been growing. Some analysts predict Facebook would seek 30% of third-party income generated from mining its social graphs (like its current arrangement with Ticketmaster), which eventually could comprise more than one-third of overall revenues. Even more enticing is Facebook’s e-commerce prospects, which are nascent with only 2% of Facebook users (or 15 million members) spending $557 in payments in 2011, according to BI.
The most bullish endorsements for Facebook cite consumer adoption (900 million users in eight years, compared with Google's 1 billion users in 14 years), time spent (14% of time online globally, suggesting revenue potential of $14 billion globally, $6 billion of it in the U.S.), and margin expansion (up to 47% in 2011, suggesting profit growth will be faster than revenue growth).
On the all-important mobile front, more than half of Facebook's monthly active users accessed the network through mobile devices, driving its daily active user growth, particularly outside the US, without any sure way to mine advertising, payments or video (in the face of service providers' ridiculously low streaming caps) to monetize.
So while Needham analyst Laura Martin argues that Facebook's 14% of online time spent globally can translate to 14% of Zenith's $98 billion in global Internet revenues or eMarketer's US Internet estimate of $46 billion by 2013, no one can say how.
That stumper leads some, like maverick investor and entrepreneur Mark Cuban, to take the negative stance and declare that "mobile will crush Facebook." Facebook's mobile problem is fundamental: It cannot offer unlimited games, ads or other targeted interactive opportunities in a browser -- its popular credits and new HTML-based apps notwithstanding.
While the cash flows from online advertising revenues alone justify most of Facebook’s bloated public valuation, according to Bernstein analyst Carlos Kirjner, there are discrepancies.
Advertisers are used to disparity, given the wide discrepancies across sources reporting number of hours of TV spent per person in the U.S., beginning with Nielsen’s estimated 5.5 hours of per person television use, based more on the “opportunity to view” rather than measured watch, Kirjner points out. While you can directly measure the effectiveness of Facebook connects through actions such as clicks, likes, page views and viewed videos, brand advertisers are struggling to turn that into gold.
We’re nowhere near closing that gap, since the analytic metrics and tools used to measure the effectiveness of brand advertising in the off-line world have not yet been adopted or accepted in the online world. These include audience metrics and gross ratings points, which could become the adopted online advertising currency.
"They will eventually get it right because they have to," Kirjner says. Successfully designing the new advertising paradigm and leveraging its existing 20% of global ad spending could reap Facebook $56 billion in annual advertising revenues by 2025. But how much value loss will Facebook suffer till then?
Even with a domestic display ad edge, just rolling out a "like-based" search paradigm compared with Google's "link-based" search doesn't guarantee a revenue windfall. So just where and when does Facebook's value theory pragmatically give way to practice?
Now that the social network company is public, the timing and delivery are intrinsically tied to its mark capitalization and overall value. No more hiding behind the screen that has so infamously defined Silicon Valley start-ups.
For instance, Facebook founding CEO Mark Zuckerberg surprised everyone --- including his own board of directors -- with his $1 billion Instagram acquisition before the IPO. Now that his company is public, he has to deliver on the driving theory that one-click photo sharing with friends and family will be a lucrative proposition.
According to Kleiner Perkins Internet guru Mary Meeker, more people will access the Internet on their mobile devices than on their desktop PCS a year from now. That's both an opportunity and an absolute line in the sand for Facebook, the public company.