Facebook, the social networking platform that “everyone” seems to use announced that it has hit one billion active users on October 4th 2012. After months of bad news, a slumping stock price, and criticism of CEO Mark Zuckerberg, this is great news for the company. However, the magic one billion mark does not guarantee the company’s longevity in an increasingly tumultuous and ever-changing high-tech landscape.
When Facebook had their Initial Public Offering (IPO), their stock was at 38 dollars (USD). The stock then proceeded to fall to 20 dollars by the beginning of August. This fall was driven by a number of factors. First, Facebook’s revenue growth has not been as fast as the market or company had expected. As a result, the market research firm, eMarketer, revised its estimate of the company’s revenue in August, reducing it by almost one billion dollars to five billion dollars.
Furthermore, if one digs deeper into the numbers, 15% of Facebook’s revenue in Q1 2012 was from advertising or micro-transactions in the social gaming company, Zynga’s games. Zynga is currently being investigated for insider trading during its IPO and its stock is down 75% from its IPO. Additionally, revenue from its social games is down and prospects are not looking much better for the future. This trickles down to have a negative effect for Facebook’s revenue from Zynga’s games.
Outside of micro-transactions from social games from companies like Zynga, Facebook’s primary revenue source is from advertising on its website. This is a very similar revenue model to Google; however, the key difference between the two companies is their ability to generate revenue from advertising on multiple platforms. If you visit a website and see ads there is a very high probability that is provided by Google. This is similar on Android and sponsored search results on Google’s search engine. Facebook has struggled to generate revenue on mobile platforms and outside the Facebook website. The other issue Facebook faces on this front is that there is a fine line between generating revenue from users, and making ads annoying and a hindrance to using the platform.
For example, before the creation of the many popup blockers we had today, there were hundreds of popups. These ads were sometimes inappropriate, made loud noises, or just interrupted the user of the website. In reaction to these, and other forms of interruptive advertising, ad and popup blockers have been built into modern browsers. This has reduced revenue for websites that implemented these forms of advertising and many websites that don’t implement these practices now ask for users to turn off their ad-blocker so they can generate more revenue.
If, to increase revenue, Facebook started to implement a popup that directed me to try “Farmville X” or populated search results with “sponsored results” that blocked the user from finding what they actually wanted, users would be annoyed. As a result, there are diminishing returns to advertising on the Facebook platform. Without diversifying their advertising mediums, revenue will eventually hit a cap, regardless of the number of users on the platform.
The last factor that contributes to Facebook’s troubles is the nature of the product that it is. Facebook is consumer software that enterprise companies mainly use for advertising. This causes their enterprise clients to exist on the pure basis that their current users keep using the platform. Therefore, if users find a new social platform to use instead of Facebook, their corporate customers will depart as well. Without having stable enterprise services and customers, success is purely based on users agreeing with what the company does and staying in the platform.
In the summer, people were asking “what is wrong with Facebook?”, as there were and still are many reasons that the company’s stock was struggling. However, with moves to be more aggressive with advertising, Facebook has managed to pull its stock back up. What this means for the future is anyone’s guess. It will be greatly dependent on what happens to Zynga and if the company can find new innovative ways to keep those one billion users.
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