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Facebook's a goldmine but mining isn't easy
June 1, 2012, Friday
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FACEBOOK, initially valued at US$104 billion, held its long-awaited IPO on May 18, only to see its stock barely rise above the opening price of US$38. By May 22, the stock had fallen by 18 percent, closing at US$31 - reducing the value of the stocks sold during the US$16 billion IPO by more than US$2.9 billion.
Facebook had warned in its IPO filing about the challenges it was facing in mobile advertising: As consumers increase their use of mobile applications for sites like Facebook, the firm will need to figure out how to shift its ad sales accordingly to mobile platforms. It also cited growing competition from Google and social networking upstarts such as Pinterest, noting that users could simply migrate to another site.
Risks aside, few would have expected that Facebook, with its seemingly endless growth and strong revenues, would have had such a rocky debut in the market. But according to Wharton faculty and other observers, the problem is fairly clear: No one knows how to value the company's 901 million users.
To gauge the worth of Facebook's audience, Wharton finance professor Luke Taylor suggests that it makes sense to value the amount of time users spend on the site. "Facebook is replacing TV and other media as a form of entertainment," he says. "How much are TV companies worth, and how much of that value can Facebook steal?"
Eric Clemons, an operations and information management professor at Wharton, says that no matter how you value a Facebook user, the numbers don't add up. "Basically, the valuation of US$104 billion is indefensible with what we know now," says Clemons. "Facebook is 1,000 times larger than The New York Times in terms of users but its ad revenue is only a third larger" than the latter's. He adds that the company will be nowhere near as profitable as competitors like Google without a new business model or new technology to better target users.
Wharton marketing professor Peter Fader agrees that valuing a Facebook user is almost impossible under the current circumstances. The challenge for Facebook is that its users don't appear to be visiting the site for commerce or to view ads.
The trick for Facebook in the future will be connecting its 901 million users to revenue, says Fader.
Facebook's best opportunity for growth will be by charging people real money, he adds. For instance, the company could launch a premium service that would offer more control, customized content and perhaps an ad-free experience.
Indeed, Facebook is in the early stages of launching a new offering for "Promoted Page Posts," which allows organizations that administer Facebook pages to have their posts seen by more of the people who "like" the page than would normally be reached - for a fee ranging from US$10 or so up to much larger amounts, depending on the total reach of the post.
Other analysts have argued that Facebook could grow its payments platform, which is called Facebook Credits, by encouraging small transactions among its large user base.
Facebook's commerce system is mainly used for in-game purchases of virtual goods via Zynga, which makes Farmville, Words With Friends and other popular games.
Analysts have noted that the symbiotic relationship with Zynga could become an issue for both firms. Social games aren't as stable as advertising, because consumers are fickle, notes Wharton legal studies and business ethics professor Kevin Werbach, so it's dangerous for Facebook to rely on them.
For its part, Zynga is starting its own site to diversify away from Facebook. Zynga has said that nearly all of its revenue is based on Facebook distribution.
Pivotal Research analyst Brian Wieser said in a research note that he expects Facebook to diversify eventually into music and film rentals and sales. Wieser predicts that Facebook will have US$1.7 billion in media content revenues by 2017.
But until Facebook develops its business model along those lines, the company is largely dependent on display advertising - and for now, that is the primary challenge facing it.
"Facebook has not yet been able to find an ad model to generate revenues commensurate with its valuation," notes Saikat Chaudhuri, a management professor at Wharton.
"Facebook has not articulated a clear mobile strategy in the wake of that platform's proliferation - especially in fast-growing markets - and users generally appear sensitive to changes. While the potential to harness the user base is huge, it is not clear how exactly that will or can be done."
Adapted from Knowledge@Wharton, http://knowledgeatwharon.upenn.edu. To read the original version, please visit:http://bit.ly/Jr0Yf0
Facebook had warned in its IPO filing about the challenges it was facing in mobile advertising: As consumers increase their use of mobile applications for sites like Facebook, the firm will need to figure out how to shift its ad sales accordingly to mobile platforms. It also cited growing competition from Google and social networking upstarts such as Pinterest, noting that users could simply migrate to another site.
Risks aside, few would have expected that Facebook, with its seemingly endless growth and strong revenues, would have had such a rocky debut in the market. But according to Wharton faculty and other observers, the problem is fairly clear: No one knows how to value the company's 901 million users.
To gauge the worth of Facebook's audience, Wharton finance professor Luke Taylor suggests that it makes sense to value the amount of time users spend on the site. "Facebook is replacing TV and other media as a form of entertainment," he says. "How much are TV companies worth, and how much of that value can Facebook steal?"
Eric Clemons, an operations and information management professor at Wharton, says that no matter how you value a Facebook user, the numbers don't add up. "Basically, the valuation of US$104 billion is indefensible with what we know now," says Clemons. "Facebook is 1,000 times larger than The New York Times in terms of users but its ad revenue is only a third larger" than the latter's. He adds that the company will be nowhere near as profitable as competitors like Google without a new business model or new technology to better target users.
Wharton marketing professor Peter Fader agrees that valuing a Facebook user is almost impossible under the current circumstances. The challenge for Facebook is that its users don't appear to be visiting the site for commerce or to view ads.
The trick for Facebook in the future will be connecting its 901 million users to revenue, says Fader.
Facebook's best opportunity for growth will be by charging people real money, he adds. For instance, the company could launch a premium service that would offer more control, customized content and perhaps an ad-free experience.
Indeed, Facebook is in the early stages of launching a new offering for "Promoted Page Posts," which allows organizations that administer Facebook pages to have their posts seen by more of the people who "like" the page than would normally be reached - for a fee ranging from US$10 or so up to much larger amounts, depending on the total reach of the post.
Other analysts have argued that Facebook could grow its payments platform, which is called Facebook Credits, by encouraging small transactions among its large user base.
Facebook's commerce system is mainly used for in-game purchases of virtual goods via Zynga, which makes Farmville, Words With Friends and other popular games.
Analysts have noted that the symbiotic relationship with Zynga could become an issue for both firms. Social games aren't as stable as advertising, because consumers are fickle, notes Wharton legal studies and business ethics professor Kevin Werbach, so it's dangerous for Facebook to rely on them.
For its part, Zynga is starting its own site to diversify away from Facebook. Zynga has said that nearly all of its revenue is based on Facebook distribution.
Pivotal Research analyst Brian Wieser said in a research note that he expects Facebook to diversify eventually into music and film rentals and sales. Wieser predicts that Facebook will have US$1.7 billion in media content revenues by 2017.
But until Facebook develops its business model along those lines, the company is largely dependent on display advertising - and for now, that is the primary challenge facing it.
"Facebook has not yet been able to find an ad model to generate revenues commensurate with its valuation," notes Saikat Chaudhuri, a management professor at Wharton.
"Facebook has not articulated a clear mobile strategy in the wake of that platform's proliferation - especially in fast-growing markets - and users generally appear sensitive to changes. While the potential to harness the user base is huge, it is not clear how exactly that will or can be done."
Adapted from Knowledge@Wharton, http://knowledgeatwharon.upenn.edu. To read the original version, please visit:http://bit.ly/Jr0Yf0
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