Facebook. Do they really know what they have done?
Facebook, arguably one of the two greatest internet success stories of the last decade, the other being Google (to be kind we won't mention, Google +, and most certainly not Google Wave!). They have both become behemoths on the internet; One dominates social media the other internet searches.
So, Facebook has made the move to a public listed company. It has made it with a huge value, £104bn (£66bn). But it is still a small child compared to the large tech beasts, as viewed from market capital;
As you can see, Apple dominates the Tech industry with Microsoft quite a way behind. But the fundamental difference between Apple/Microsoft & Google/Facebook, is that they make 'Things'. In the case of Apple, they make very beautiful things. Microsoft make 'not as beautiful things', but they are on millions of more machines than Apple tech.
And this is where both Google and Facebook sit, precariously. Why? Let's talk Facebook.
Facebook doesn't make anything. It does not manufacture Computers to use Facebook. It does not manufacture Mobiles to use facebook. But why it is seen as a valuable company is from its ability to monetise Facebook's 900million users through targetted advertising, its revenues have increased massively to in 2011 $3.8bn and it is predicted to rise, a lot, reaching $7bn by 2013. These figures seemingly justify investors valuing the company at $104bn dollars. It seems inexorable that Facebook will continue to rise and rise, to add further and further revenue increases year on year. And that seems to be that. But is it? Is Facebook's Value truly robust and impregnable? I, and this is my personal view, think not. My main argument is the nature of the company and 'Myspace death'.
Facebook is now a public company and it is now owned by people who can buy and sell shares in it (The founder Mark Zuckerburg, remains majority shareholder), and it has proved popular for investors to pile into. It may even begin to make them a profit if the share value rises over the coming years, but I am a little worried that investors have all got a little carried away with a company whose most impact asset is not that it makes 'Beautiful things' like Apple that people need to own. It has 900million users. This is it. Everything is driven from this. The whole business, the whole empire and all the advertising is driven from this figure. It is a business made on the backs of you, me, everyone who has signed up to Facebook.
If you can deliver to global brand advertisers, one site, with access to 900million (mainly westernised users, who come with brand loyalty and disposable incomes to match), you, as an advertiser will pay for that access and you will pay the people providing that site to walk through Facebook gates to their users. in 2011 they paid Facebook $3.8bn for that privilege.
But there are risks to Facebook and they are pretty big risks. Here are two of them.
Death by MySpace. Does anyone here remember MySpace? It dominated the internet at the beginnings of the social media revolution (lets not even go down the friends reunited web story). From 2003 to 2008 Myspace dominated social Media. It had at its peak 86% of the social media market (A relatively new company had only 7.6 at the time (4 yrs ago), it was called Facebook!), MySpace's success was profound and demonstrated that online, targeted advertising on your users was a successful business model that could generate revenue. (In MySpace's case, a £900m 3 yr advertising deal with Google). MySpace was gold. This was reinforced by News Corporation (Rupert Murdoch) buying the company for $580m, which at that time was a vast amount of money for a company that didn't manufacture anything. And so it proved, the awful site design and slowness I experienced as a user drove me off MySpace around this time (Not before I had discovered for myself some great new artists; Jenny Owens Young, Laura Veirs and Thea Gilmore), but decline it did and rapidly for many reasons, which you can discover if you search the web for them and the opinions of others who put it down to many reasons, some highly geek. But from its peak in 2007 where it was valued at $12bn, it was finally sold by New Corps after haemorrhaging cash and users for $35m! (in 6 years, News Corp took a loss of $500m dollars).
And there in lies the danger for Facebook (it is fair to point out that Facebook's 900m users is a huge amount and far beyond the figure MySpace ever reached), but the bsuiness model is pretty similar. Advertisers advertise because of those users; there is some argument that the advertisers are a little in love with a brand that might not be great value in the targetted environment;
The second danger is the tool used to access a advertising reliant website. Anyone access Facebook via an iphone? Ipad? Android? What is the first thing you notice on the App? A distinct lack of advertising, perhaps. Yep, there is none. What would happen to Facebook revenues if its 900m users decided to only access facebook via an iphone or an android? It would drop through the floor because why would an advertiser pay to advertise on the web through Facebook if no-one viewed the website version? The solution? Of course at this point adverts would start appearing on your phone or tablet, smaller screens mean either the advert will be unreadable or take a lot of screen real estate, result? Arguably very frustrated and annoyed Facebook users who can't be bothered to face deluges of quite frankly annoying advertising they put up with on the website because it is that little more discreet on a PC. You then start voting with your feet! (MySpace death). Suddenly you may find yourself in a vicious circle. Placing more adverts to replace lost revenue from falling users, who are leaving as you place more adverts on their mobile devices and so on...and so on...!
Two years ago I accessed facebook 100% on my PC. Now, it's possibly half of my time. I prefer the ipad, I prefer my iphone.
And this is where both Google and Facebook sit, precariously. Why? Let's talk Facebook.
Facebook doesn't make anything. It does not manufacture Computers to use Facebook. It does not manufacture Mobiles to use facebook. But why it is seen as a valuable company is from its ability to monetise Facebook's 900million users through targetted advertising, its revenues have increased massively to in 2011 $3.8bn and it is predicted to rise, a lot, reaching $7bn by 2013. These figures seemingly justify investors valuing the company at $104bn dollars. It seems inexorable that Facebook will continue to rise and rise, to add further and further revenue increases year on year. And that seems to be that. But is it? Is Facebook's Value truly robust and impregnable? I, and this is my personal view, think not. My main argument is the nature of the company and 'Myspace death'.
Facebook is now a public company and it is now owned by people who can buy and sell shares in it (The founder Mark Zuckerburg, remains majority shareholder), and it has proved popular for investors to pile into. It may even begin to make them a profit if the share value rises over the coming years, but I am a little worried that investors have all got a little carried away with a company whose most impact asset is not that it makes 'Beautiful things' like Apple that people need to own. It has 900million users. This is it. Everything is driven from this. The whole business, the whole empire and all the advertising is driven from this figure. It is a business made on the backs of you, me, everyone who has signed up to Facebook.
If you can deliver to global brand advertisers, one site, with access to 900million (mainly westernised users, who come with brand loyalty and disposable incomes to match), you, as an advertiser will pay for that access and you will pay the people providing that site to walk through Facebook gates to their users. in 2011 they paid Facebook $3.8bn for that privilege.
But there are risks to Facebook and they are pretty big risks. Here are two of them.
Death by MySpace. Does anyone here remember MySpace? It dominated the internet at the beginnings of the social media revolution (lets not even go down the friends reunited web story). From 2003 to 2008 Myspace dominated social Media. It had at its peak 86% of the social media market (A relatively new company had only 7.6 at the time (4 yrs ago), it was called Facebook!), MySpace's success was profound and demonstrated that online, targeted advertising on your users was a successful business model that could generate revenue. (In MySpace's case, a £900m 3 yr advertising deal with Google). MySpace was gold. This was reinforced by News Corporation (Rupert Murdoch) buying the company for $580m, which at that time was a vast amount of money for a company that didn't manufacture anything. And so it proved, the awful site design and slowness I experienced as a user drove me off MySpace around this time (Not before I had discovered for myself some great new artists; Jenny Owens Young, Laura Veirs and Thea Gilmore), but decline it did and rapidly for many reasons, which you can discover if you search the web for them and the opinions of others who put it down to many reasons, some highly geek. But from its peak in 2007 where it was valued at $12bn, it was finally sold by New Corps after haemorrhaging cash and users for $35m! (in 6 years, News Corp took a loss of $500m dollars).
And there in lies the danger for Facebook (it is fair to point out that Facebook's 900m users is a huge amount and far beyond the figure MySpace ever reached), but the bsuiness model is pretty similar. Advertisers advertise because of those users; there is some argument that the advertisers are a little in love with a brand that might not be great value in the targetted environment;
"So if we’re not sure about the effectiveness of Facebook ads, why are ad revenues rising? I have to believe it’s another case of “doing it because everyone else is doing it.”Facebook, whether it believes it not is heavily reliant on its users to drive its revenues. You cannot have one without the other. It is simple, but terrifying maths to an internet entrepreneur. A site with 900m users will generate revenue from people wishing to sell to them. A site with 30m users will not generate the same amount of revenue. If Facebook suddenly lost 200m unique users and fell to 700-600m, the share price will drop like a stone and $104bn will look very over ambitious. The pressure on Facebook will be to maintain those users all connected to the website version (for obvious reasons discussed later below) and either/or diversify the company into other profitable areas to manage this potential catastrophic risk.
The second danger is the tool used to access a advertising reliant website. Anyone access Facebook via an iphone? Ipad? Android? What is the first thing you notice on the App? A distinct lack of advertising, perhaps. Yep, there is none. What would happen to Facebook revenues if its 900m users decided to only access facebook via an iphone or an android? It would drop through the floor because why would an advertiser pay to advertise on the web through Facebook if no-one viewed the website version? The solution? Of course at this point adverts would start appearing on your phone or tablet, smaller screens mean either the advert will be unreadable or take a lot of screen real estate, result? Arguably very frustrated and annoyed Facebook users who can't be bothered to face deluges of quite frankly annoying advertising they put up with on the website because it is that little more discreet on a PC. You then start voting with your feet! (MySpace death). Suddenly you may find yourself in a vicious circle. Placing more adverts to replace lost revenue from falling users, who are leaving as you place more adverts on their mobile devices and so on...and so on...!
Two years ago I accessed facebook 100% on my PC. Now, it's possibly half of my time. I prefer the ipad, I prefer my iphone.
"Facebook said growth in the number of users using Facebook on mobile devices, which is hard to monetize, “may negatively affect our revenue and financial results.”In an amended regulatory filing, the company said the number of people logging into Facebook is continuing to grow more quickly than the number of ads delivered.Facebook said this is in part because more people are using the social network on mobile devices, where it shows a very small number of ads.Here is the analysis of that story It is not an idle threat either. If Smartphones, tablets continue decimating the PC's standing as the tool of choice to accessing 'social media' then tough times lie ahead, which puts an alternative spin on todays listing that may well be a warning to those who are going to spend money on Facebook shares. May be better off investing, if they want tech shares, in companies that manufacture, such as Apple & Facebook, Dell, etc because Facebook (And we must never underestimate its genius, and revolution of social media itself) as strong as it seems now, may well have feet of clay.
The disclosure sent up red flags for analysts, because the company also said it does not “currently directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven.”
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