After IPO, what's next for Facebook?
From China to local to search, there are plenty of opportunities -- and challenges.
By Tomio Geron
Facebook's blockbuster initial public offering this week, which could be worth $12.8 billion at the top of the range, is expected to be the largest Internet IPO ever, surpassing Google's (GOOG) 2004 IPO of less than $2 billion.
Reflecting the intense interest in the IPO, Facebook increased the range on its offering Monday to $34 to $38 per share. After the IPO, Facebook will be flush with cash.
Once the frenzy on the IPO subsides, Facebook will get back to the work of building the company and hacking away in line with Mark Zuckerberg‘s ethos. What are the biggest questions about Facebook's future? Here are some thoughts on various aspects of the company.
China, or how big can Facebook grow?
Facebook already has 900 million users or 40% of the global Internet population. But Facebook is blocked in China, the world's most populous country, as are many U.S. Internet companies. For Facebook to continue its rapid growth and to realize its goal of connecting the world, Facebook would need to somehow enter China. Whether that will eventually happen is unclear. There's always the possibility that Facebook could partner with a local Internet company to enter the market. Zuckerberg has been learning Chinese, so perhaps he's prepping his negotiation skills. Despite all of Facebook's massive growth, without China, growth for Facebook would now be slower than it was for previous Internet companies, says Morningstar's Rick Summer in a recent report: "Disregarding China, we expect growth in Internet users to be much slower than it was a decade ago when companies like Google went public, limiting the growth opportunity for Facebook."
There's been much hand-wringing over Facebook advertising after GM (GM) announced it was pulling its Facebook advertising. You can debate the merits of Facebook ads, particularly social ads that the company has been pushing. But there are two other long-term products that could have big implications for advertising prospects. The two big products that are likely on the way are a search product of some kind and an off-Facebook advertising product, says Patrick Salyer, CEO of social media startup Gigya.
Off Facebook ad platform
An off-Facebook ad platform makes sense and is something that many in the industry expect. Recent Facebook privacy changes make it even clearer, as my colleague Kashmir Hill notes. Facebook already has Like buttons scattered across the web on third party sites. When users click these Like buttons, Facebook gets data about its users, their interests and sites that they visit. Using that network to somehow add advertising to third-party sites is a natural next step. Facebook already has a wealth of data about its users, including demographic information and their interests. The company could use that data to provide targeted, personalized ads. It could also provide the types of social ads on third-party sites that it has been using on Facebook.com. "How they can beat others? Through data," says Salyer. "By logging in across the web you integrate identity information and you'll be able to display ads across the web. There is in my opinion so much opportunity for Facebook."
A Facebook search product has long been discussed. While Facebook has worked with others such as Microsoft's (MSFT) Bing, it still does not have a real search product on its site. Right now if you search for "burgers" or "dry cleaning" Facebook will suggest people or Facebook pages related to those items. Below those results are Bing search results, but there is no social component to the Bing results. Recently Bing added social features to its own search results and Google added semantic data to its search results. (Microsoft owns and publishes TechBiz, an MSN Money site.)
While there are many directions Facebook could go with search, whatever it does will address one issue that has been raised about Facebook advertising: intent. People on Facebook are not looking for a product, while on a search engine like Google, people are specifically searching for something. A Facebook search engine would address that, and presumably provide a large new potential revenue source. "In my opinion (Facebook) will be ultra focused on revenue in a way they haven't been," Salyer said. "There's a lot of opportunity but before they hadn't been as focused on those things. You're already starting to see that. They launched a paid app store. I'm sure they'll launch a search engine to compete with Google. To differentiate from Google, the Open Graph will be key."
Facebook could also partner with another search engine, says Morningstar in a recent report: "We also believe that Facebook could partner with a search engine to offer search engine advertising. While we do not believe such a move would disrupt Google's dominance, we believe the firm could easily generate a meaningful amount of revenue in the same way traditional portals (e.g. Yahoo and AOL) earn search revenues."
While much of the focus has been on Facebook's potential for revenue growth in advertising, payments are a major source of potential growth. About 15% of Facebook's revenue in 2011, or $557 million, was generated from payments. And 15 million users purchased virtual goods using Facebook payments in 2011. That primarily comes from games and users buying items using Facebook Credits, for which Facebook takes a 30% fee from developers. Payments generated $186 million or 17.5% of Facebook's revenue in the first quarter of 2012. That's up 98% year-over-year, though the comparison is not great because Facebook didn't make Credits mandatory until July 1, 2011.
Social gaming isn't going anywhere and is still growing, as larger console-style games face continuing challenges. The bigger question is whether Facebook will open up Credits to enable purchasing of other products. The easiest move is to move to other digital media such as music, tv shows or movies, and the like. Facebook has already recently revamped its Offers servic -- and digital coupons are essentially another form of digital media, even though they represent services since there is no physical product to pack, ship and fulfill. Long term, turning on Facebook Credits for the purchasing of physical goods would not be surprising. Facebook says in its S-1: "We currently require Payments integration in games on Facebook, and we may seek to extend the use of Payments to other types of apps in the future."
Local commerce and offers, as mentioned above, also is a large opportunity. It's one that Facebook is no doubt interested in and for which it is planning to roll out additional products. Morningstar notes in its recent report: "With respect to the market for local advertising, we expect the bulk of spending will coalesce around Facebook and Google. Facebook could offer a full suite of services to a merchant including lead generation, brand building, coupons, transactions, payments and customer service."
Developers -- Zynga
Zynga (ZNGA) accounted for 19% of Facebook revenue in 2011 and 15% in the first quarter of 2012. That was made up of 12% in payments in 2011 and 11% in the first quarter of 2012. Will Facebook's reliance on Zynga decrease going forward? Zynga has launched its own gaming website, Zynga.com. How will Zynga's increasing independence affect Facebook?
More generally, can Facebook keeps its third party developers happy? For many, Facebook is still a massive source of traffic. "Facebook is still our number one non-paid traffic source," says Jason Goldberg, CEO of Fab.com. While other social services such as Twitter, Pinterest and Google+ try to compete, Facebook has to keep providing features and services to keep developers and their users coming back.
As Facebook's $1 billion acquisition of Instagram made clear, mobile is the key focus for Facebook. On its IPO roadshow, CEO Mark Zuckerberg said his top priority was improving Facebook's mobile application. While Facebook has become dominant in social networking with 900 million users, in mobile it still has room to improve. Granted, the company had 488 million mobile users in March, but as Zuckerberg notes, mobile is key to growth for Internet companies in the future. The acquisition of Instagram should help, but look for Facebook to make further acquisitions in the future, such as the recent acquisition of Glancee, a new social location app.
Facebook currently does not monetize mobile nearly as well as it does its desktop site. But that could change quickly, says Jens Begemann, cofounder and CEO of social gaming company Wooga. "I think what Facebook has done on mobile is similar to what they've done on the desktop," said Begemann. "First they focused on user experience and making the platform very engaging and not so much on monetizing. It's similar with mobile, first they've made a great engaging user experience, then later they put a stronger focus on monetization."
No, it isn't Google or Microsoft. While those are tech giants and have considerable resources to throw at social, they haven't yet shown that they can seriously challenge Facebook in the social sector. It's more likely to be a startup that wants to be the next Facebook. Instagram was one such threat, though Facebook eliminated that threat by acquiring it. Who are the others? Most likely it is a mobile company or location company. For all of Facebook's dominance in social networking, its strength has been on the web, not on mobile. A pure mobile social company could go after Facebook at its most vulnerable. Could it be a company like Highlight or Circle in the years to come? There are many startups like them still just starting out. It's just as likely that Facebook's biggest threat may be a startup that hasn't even launched yet.
Facebook has a large "economic moat", according to a recent Morningstar report, due to its social graph connecting all its users as well as brands, developers and advertisers. For example, people can use Facebook as an identity across the web, providing a massive potential for personalization, targeting and the like on third-party sites. However, Morningstar sees risks for Facebook in the regulatory arena, backlash over privacy, and lack of clarity for advertisers on ROI on Facebook. On the upside, Morningstar sees possibilities in other advertising areas such as search and content distribution in music or video.
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They better get their egos in check & address their quality issues: I'm on less & less as the problems mount & they make major changes without informing users.
"After IPO, what's next for Facebook?"
Put Options with a strike of $25 I hope. I'm a buyer of those.
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