Beyond the IPO: What Challenges Facebook Will Face
As Facebook winds down an obligatory pre-IPO road show and prepares for its first day of public stock trading May 18 as "FB" on the NASDAQ exchange, investors and potential investors are thinking way beyond just how high the stock price will jump on the first day.
- Can Facebook prove its overall value and sustain profits for its backers over time?
- Can its advertising model continue to evolve and find new ways to make income?
- Can the company identify and penetrate new business markets?
- Can the company figure out efficient ways to monetize itself in the mobile space?
- How will the company continue to toe the line regarding the privacy of its users, because so much of that private information represents eventual profit for the company?
And those are only five of the myriad questions. With regard to the IPO, time now becomes a major factor in how Facebook does its many jobs. With all that money in the bank comes more pressure to get products and services created and into production faster than Facebook might prefer.
So What's Ahead?
What will Facebook do to make money besides selling those little right-hand column ads to numbers of businesses?
"Facebook, like the whole IT business, is just at the beginning of a lot of things," analyst Charlene Li, founder of the Altimeter Group, said May 13 on NBC Bay Area's "Press:Here." "This is a company that's only 8 years old, the advertising market in this space is maybe three or four years old.
"Just two years ago, the [online] advertising was minuscule compared to where they're at today," Li said. "If they just continue on that trajectory, they will continue to meet those expectations. And what we're seeing is that the advertisers also have a pent-up demand and appetite. Mobile has been around, but the mobile advertising market hasn't."
One example is that Facebook recently signed a deal to help Apple sell more applications from its AppStore. Other partnerships are said to be in the hopper.
"The biggest issue isn't so much the app experience and the user experience as it is that they're shifting people away from a very lucrative space, the Web platform, into a mobile platform where they can't advertise, which is the adjustment they highlighted in their S-1," Li said.
Facebook on May 9 filed the sixth amendment to its S-1 filing with the SEC for its IPO, acknowledging the new challenges of monetizing advertising on mobile devices, which have much less virtual real estate to sell than laptops, desktops or even tablets.
The company addressed the concerns that have been raised over the fact that more users are accessing Facebook via mobile devices, and that it is limited in the number of ads it can pass through to those users.
But Facebook will have to find other ways to use its power, Li said.
"Facebook has been able to take your activity feed and the stream and insert relevant marketing tools and messages into that," Li said. "The bigger issue is that the people who pay for those mobile ads, the advertisers, haven't embraced mobile advertising. They're still trying to figure out social, and frankly, a lot of them are still trying to figure out digital. They're still having this big debate, and digital has been around for 15, 20 years."
Preparations Being Made
This easily will become the largest IT initial public offering ever, raising some $5 billion and officially valuing the barely 8-year-old company at close to $100 billion. The gravity of such a financial windfall is requiring some preparation by a good number of the original 500 or so investors in the company.
One of them is Eduardo Saverin, who was CEO/founder Mark Zuckerberg's closest confidant and chief marketer when the company was in its early days at Harvard. Saverin, as is well-known through the movie "The Social Network," has long since separated himself from the company, but he still owns 4 percent of Facebook. When that $100 billion valuation becomes reality, he'll own--that's right, the math's easy--$4 billion worth of stock.
With this in mind, the Brazilian-born Saverin took matters into his own hands last fall, changing his citizenship from U.S. to Singapore, where he won't have to worry about the tax burden all the American investors will have. Saverin paid a special tax--the amount isn't known--on the capital gains from his Facebook stock last year, but when the stock is issued, its value will be tax-free for him.
The rule goes like this: Americans with a certain personal assets value--as determined by the U.S. Securities and Exchange Commission--must pay the so-called "exit tax" if they seek to renounce their citizenship. The Report of Foreign Bank and Financial Accounts, or FBAR, requires Americans abroad with at least $10,000 in foreign bank accounts to report them to the IRS or face a fine.
Wraps Up Main Part of Road Show
Facebook ended its main U.S. road show on May 11 with a big invitation-only presentation at the Crowne Plaza hotel in Palo Alto, Calif., in front of many of the biggest investors in IT. Zuckerberg led off with a 10-minute overview, then introduced Facebook's Chief Operating Officer Sheryl Sandberg and Chief Financial Officer David Ebersman, who answered questions for about 35 minutes.
The road show started May 7 in New York and went to Boston May 8, Chicago May 9 and Denver May 10. Presentations are scheduled to finish May 17, the day before the IPO.
Facebook also will hold some smaller private meetings in the coming week but nothing as big as those four. The company also has posted a version of its road show presentation online.
Chris Preimesberger is Editor of Features and Analysis for eWEEK. Twitter: @editingwhiz