Facebook shares will bomb because we’re too busy communicating with our friends to pay attention to advertisers…
The Wall Street Journal - Deal Journal Blog published an article entitled Analysts offer bullish views on Facebook ahead of IPO on May 7th, 2012. Here’s an extract:
The company should be valued between $140 billion and $160 billion, says Evercore Partners analyst Ken Sena. Facebook is targeting between $77 billion and $96 billion. Sena contends that the company’s advertising platform is changing faster than Wall Street realizes. Facebook is creating a platform for publishers to sponsor content in news feeds, where users see updates, Sena notes, and has introduced algorithms to measure reach of that content.
“Based on this work, we believe that Facebook will redefine advertising and that the company is on course to be the most valuable media company in existence,” he said.
We’ve been here before – twelve years ago in fact. The gold rush to get hold of Lastminute.com IPO shares, the then darling of the FTSE, meant that that demand outstripped supply and the prices, initially at least, sky-rocketed. All was rosy and peachy for a whole mesmerising 24 hours until the share price dropped; the fairy tale effectively over. By the time their first post-IPO quarterly results were released, the price was more or less back to IPO levels and the price just continued to drop… fortunately, for the founders and VC backers at least, the company was eventually sold to Sabre Holdings/Travelocity for half the IPO price. For shareholders it was much less fun.
As a consumer I liked and continue to like Lastminute.com, it’s always been a great brand and they have a fantastically simple high volume, low-margin business model. I’ve enjoyed many a trip to the theatre using their site, I just didn’t think it was a wise stock purchase, and not to be accused of being a “hindsight is 20/20” commentator, wish to plant my flag in the ground now regarding Facebook.
I like Facebook and I use Facebook a lot – I return to the site every day and utilise the platform because a/ it works and b/ it’s free. However, I feel that the outrageous valuation figures are nonsense and are a sure-fire way for investors to lose some or all of their money. Facebook is cash-, and more importantly, influence-rich; they don’t require our help. The Exec team are going IPO because they have to list, not because they want to or need to. This is a significant point, which I think gets missed by all the analysts. Mark Zuckerberg will retain a controlling stake in the company and, if the reports are to be believed, will continue with whimsical purchases and maverick decisions of his own choosing without the consent or even informing his board of directors - until after the event. The same graces, we can safely assume, will be extended to the future shareholders, no matter how big or ‘influential’.
The acquisition of Instagram was a smart purchase in terms of product – like it or love it, it’s simple, fun and people use it! But it doesn’t get Facebook into mobile advertising – the supposed fix-all to all of Facebook’s advertising woes, it just gets Facebook into mobile – but they’re there already… It wasn’t a wise purchase in terms of adding new users, no matter how “mobile-savvy” they may be – of those 50 million users around the time of acquisition, I doubt many of them were new acquisitions to Facebook– i.e. I’d guess over 99% already had a Facebook account and therefore it’s impossible to justify the $1+Billion in cash and shares they paid for what is in effect a $20k app.
Facebook users, of which there are a staggering 900 million, use Facebook primarily as a social tool – to post and read status updates and photos for and from their ‘friends’ or areas of interest – for all the millions of ‘likes’ handed out every day to company pages, this does not necessarily result in additional business for those companies, despite what ‘price’ analysts might place on branding and awareness. Advertising on Facebook may be segmented and targeted, but it is intrusive, out-of-context and doesn’t generally work – for advertiser or user. Smartphones have revolutionised how users access the web and Facebook are right to think of their mobile offering and potential revenue streams, but translating their advertising model effectively across to mobile makes things even more difficult for both parties not least because of the smaller screen and any attempt to gate off content with pre-roll or pre-access advertising will backfire spectacularly.
People use Google to find information, this is why their Adwords advertising service makes sense to advertisers and why it works as a medium – users click on ads because they’re relevant, not seen as intrusive and they catch users at the right time of their ‘buying cycle’ whether it’s information gathering, research or purchase decisions. Facebook, on the other hand, despite it’s enormous ‘consumer’ data and segmentation capabilities does not have a captive audience interested in purchasing – Seeing adverts on Google is like being approached by a sales rep when you’re already in the shoe shop with your hand on your wallet. Seeing adverts on Facebook (be it on mobile or web) is like receiving a telesales call when you’re hosting a dinner party at home… “can you call back later please Facebook, I’m busy with my friends…”