Facebook Files for IPO
Facebook today filed to go public in a bid to raise $5 billion with a mammoth stock offering .
Facebook’s IPO has been eagerly anticipated as a defining moment for the latest Web investing boom. The social-networking company, with more than 800 million members and strong sales of about $4.3 billion last year, has redefined the way millions of people worldwide interact and share information on the Internet.
A Facebook valuation of roughly $100 billion would rank the company just below McDonald’s, which is currently 25th, at $101.5 billion, says Howard Silverblatt at Standard & Poor’s.
In the proposed stock offering, the 8-year-old company detailed its financials for the first time ever. It also stated the various competitive risks to the company.
Facebook shares could start trading as soon as May.
Once Facebook stock starts trading, the onus is on ramping up revenues to maintain such a lofty valuation. Facebook’s fortunes hinge on advertising, which accounted for 89% of its annual revenue last year, or about $3.8 billion. Google raked in $37.9 billion last year, 96% of that from ads.
The good news is Facebook commands a 28% chunk of the U.S. online-display ad impression market, up from 21% a year ago, says market researcher ComScore. Its closest competitor, Yahoo, had 11% of the display-ad market, up slightly from 10.9% in 2010.
The bad news is that Facebook ad sales worldwide are slackening. They grew 104% in 2011 but are expected to climb just 52% to $5.8 billion this year and only 21% to $7 billion next year, according to eMarketer.
“Facebook is not as effective as paid search (on Google, Yahoo and Microsoft),” says Dave Beltramini, director of online strategy for G5, a marketing services firm. “The intent of consumers on Google is more about shopping; on Facebook, people are more social, looking at photos of their friends’ kids.”
Facebook fares poorly in a key pricing metric used in the industry to measure the value of ad inventory in reaching an audience. Its CPM, or cost per thousand, is 22 cents, less than half the industry average for the Web (50 cents) and minuscule compared with Google ($10 to $12), says Chris Moore, a partner at venture-capital firm Redpoint Ventures.
“Users are looking for something on Google (search),” Moore says. “There is nothing that approximates that on Facebook.”
Typically, advertisers use Facebook to build brand engagement, and convert (make sales) through Google, says Melissa Hodgdon, media director at marketing agency Engauge, which works with Facebook and Google.
Improving its CPM is a matter of Facebook “targeting” what users subscribe to and status updates from friends, says John Manoogian , chief technology officer of social-advertising company 140 Proof. “They’re not taking advantage of the feed. They’re still putting most of their weight into the right” side of a member’s profile.
Facebook intends to develop ads that are more integrated into user profiles, such as those that essentially “freeze” a brand’s newsfeed post and turn it into an ad that’s only visible to someone following that brand, or a friend of a follower, says Rebecca Lieb, an analyst at market researcher Altimeter Group.
Meanwhile, display ads touting less belly fat, whiter teeth and a?ai berry cure-alls will eventually be phased out, Lieb says.
Sales beyond advertising seem overblown for now. Despite the hype about virtual goods — the cow you might buy on Zynga’s FarmVille, for instance — the category only produced $470 million for Facebook last year, a relative pittance.
But Facebook could benefit greatly from mobile ads as more smartphone users work and shop from iPhones and Android devices, says Raymond Rouf, CEO of social-marketing service GraphScience.