IE Focus | By Dr. Ricardo Perez, Professor at IE Business School
Facebook’s decision to float the company on the stock market has revealed the true figures of this internet giant, and has left quite a few questions unanswered, particularly where advertising is concerned.At last we have some real information rather than just rumors about Facebook’s business figures. Allow me to put things into context with some of the key data. In 2011, $3,200 million in revenues and $1,000 profit. Many analysts expected to see figures over 4,000 million and say they are surprised. Some say that facebook’s revenues have not grown as fast as they should (over 80%), while others complain that net margins are also going down (still at 25%). However all have a positive opinion about the almost 4,000 million that the company has to invest in order to keep growing.
But after examining all these figures there are more questions than answers about Facebook’s future. Let’s take a look at these questions and the challenges they pose for the firm.
How scalable is the advertising business as it stands today? Growth in the advertising sector has decelerated. Adverts that appear on the right-hand side of the screen (I have just counted seven on my personal page) are not relevant in the majority of cases. Hence they are of little value from the point of view of the advertiser. In spite of the fact that they changed their policy at the end of last year, attempting to raise prices and quality, they did not get the desired results. The challenge lies in finding a better formula for using the information available to customers and convert it into a more focused form of advertising.What role do third-party applications, particularly games, play? Given that they made up 15% of total revenues last year, it is a key question for the future of Facebook. Zynga already plays a crucial role in its revenues. In fact part of its future lies in developers outside the company being capable of generating enough business for the 30% that Facebook keeps to maintain its rate of growth. Some will point to the Apple’s App Store. But it is merely a complementary product for Apple designed to increase the value of its iPhones and iPads. It’s real source of income is selling its hardware. The challenge, therefore, is to build an ecosystem made up of developers that innovate and generate growing revenues for Facebook.
What role does mobile internet play in Facebook’s business? Almost half of its users are connected via their mobile phone. And the number is growing, both in terms of connection time and the percentage of total users. Facebook’s mobile version does not have adverts. Unless it is capable of quickly setting up a mobile advertising platform it could see its revenues drop as fast as its numbers of customers grow. Here the challenge is to set up, preferably before May, a convincing mobile advertising platform that is more effective than the one they currently have on the web.
How will being floated on the stock exchange affect the company’s culture? One of Zuckerberg’s main concerns about going public has always been that it could bring about cultural change. Bringing out good products is more important than the price of the company’s shares, as he keeps telling the press and the company at every opportunity. So the challenge here is to maintain the company’s entrepreneurial and innovative culture, so that it keeps daring to make changes and deal with the consequences, despite being listed.
How are they going to manage our privacy and what effect will this have on its share price? In the past the company has made radical changes in managing customers’ privacy in the face of vigorous protest and all sorts of accusations. In the end its customer base keeps growing. There has been almost 90% growth in the number of users in a year. With a greater demand for income the temptation is big. The challenge is to manage the demands of this new growth phase and its users’ demands for privacy.
There are many more questions. The answers we are given from now on will depend largely on whether or not Facebook is just another giant with feet of clay, or a new Microsoft or Google. What they need now is to find their Windows or Adwords. If they do, they will have built a new technology giant that will dominate the market for many years to come.