After IPO, Facebook will face new profit pressures

This photo from Octo­ber 2011, Face­book CEO Mark Zucker­berg smiles dur­ing a meet­ing in San Fran­cisco. (Asso­ci­ated Press file | Paul Sakuma)

MICHAEL LIEDTKE

AP Busi­ness Writer

SAN FRANCISCO — For all the huge num­bers in Facebook’s IPO papers, a sur­pris­ingly small fig­ure stands out: $4.39, the amount the site gen­er­ated per user last year.

It’s one of the company’s major chal­lenges because the total is pal­try com­pared with com­pet­ing Inter­net com­pa­nies. Google makes more than $30 a year from each reg­is­tered user. Even strug­gling Yahoo and AOL make $7 and $10, respectively.

Once Face­book goes pub­lic, Wall Street will surely demand more. That means the social net­work will almost cer­tainly have to attract a lot more users or be more aggres­sive with its adver­tis­ing, per­haps by min­ing per­sonal data even more than it does now.

But can Face­book do all that with­out spoil­ing the user experience?

The com­pany may have a tough time increas­ing the num­ber of ads on a site that has become pri­mar­ily a home for online conversations.

“It’s a com­mu­ni­ca­tions tool. Can you imag­ine what a turn-off it would be if we were talk­ing on the phone and AT&T tried to play an ad in the mid­dle of our con­ver­sa­tion?” said Uni­ver­sity of Notre Dame finance pro­fes­sor Tim Loughran, who stud­ies IPOs.

Face­book stock prob­a­bly won’t begin trad­ing until at least May, but ana­lysts already believe the com­pany will try to sell shares at a price that will give it a mar­ket value of at least $100 bil­lion — more than Yahoo, AOL and Hewlett Packard Co. combined.

To jus­tify a val­u­a­tion like that, Face­book will need to max­i­mize its rev­enue to get closer to Google, one of its biggest rivals. Google’s rev­enue of nearly $38 bil­lion last year trans­lated into about $35 per reg­is­tered user.

Face­book recorded $3.7 bil­lion in rev­enue last year.

The ques­tion is whether it can bring in more money with­out alien­at­ing the 845 mil­lion users who have become accus­tomed to hang­ing out with friends and fam­ily on the social net­work with­out an onslaught of ads.

Part of that online envi­ron­ment has been by design. Face­book co-founder and CEO Mark Zucker­berg wanted to get as many as peo­ple as pos­si­ble to cre­ate pro­files on the web­site before fig­ur­ing out the best ways to profit from all the infor­ma­tion about their inter­ests and connections.

In the­ory, those insights should enable Face­book to tar­get ads to peo­ple most likely to be inter­ested in cer­tain prod­ucts or ser­vices. That should appeal to mar­keters, giv­ing the site enough lever­age to charge more for its ads than other sites. If the ads work, Face­book should eas­ily be able to increase rev­enue per user to $10 to $12 annu­ally, said Wed­bush Secu­ri­ties ana­lyst Michael Pachter.

Before Google went pub­lic, it also faced ques­tions about its abil­ity to make money from sell­ing ads next to search results, in emails and within videos. Evi­dently most users don’t mind because Google’s annual rev­enue is now about 25 times higher than in 2003.

Adver­tis­ing isn’t the only way Face­book can make money. It charges a com­mis­sion for some of the sales of games and other ser­vices on its web­site. Although adver­tis­ing accounted for 85 per­cent of Facebook’s rev­enue last year, that was less than at Google, where ads accounted for 96 per­cent of revenue.

Most of Facebook’s non-advertising rev­enue comes from com­mis­sions paid by Zynga Inc., the maker of such pop­u­lar Web games as CityVille and Words With Friends. In its IPO papers, Face­book says it may try to increase its rev­enue by intro­duc­ing fees for other e-commerce fea­tures on its website.

Face­book, which is based in Menlo Park, Calif., eas­ily could offer sales of movies, music, even houses and cars. But believ­ing it can expand into those mar­kets requires a huge leap of faith, said Hud­son Square Research ana­lyst Daniel Ernst.

“It’s like say­ing because Chipo­tle has been good at sell­ing bur­ri­tos in cer­tain urban mar­kets in the U.S., it should be able to make more money sell­ing Chi­nese food in France,” he said.

Face­book says roughly half its audi­ence — about 425 mil­lion peo­ple — now gets access to its ser­vice on smart­phones, tablet com­put­ers and other mobile devices. But the site acknowl­edges it hasn’t fig­ured out the best way to make money from mobile users.

The application-driven sys­tems on mobile devices pose another threat because they could allow Zynga and other ser­vices to offer their own mobile apps to bypass Face­book and con­nect directly with users.

The rise of mobile devices also opens up an oppor­tu­nity for Google to expand the audi­ence of Plus, its social net­work­ing alter­na­tive to Face­book. Although it hasn’t done so yet, Google could make Plus part of the Android oper­at­ing sys­tem that runs 250 mil­lion smart­phones and tablets.

Zucker­berg, Facebook’s con­trol­ling share­holder as well as its leader, is promis­ing to put users’ inter­ests ahead of the company’s finan­cial interests.

“Sim­ply put: We don’t build ser­vices to make money; we make money to build bet­ter ser­vices,” Zucker­berg wrote in a let­ter included in Wednesday’s IPO fil­ing. “These days, I think more and more peo­ple want to use ser­vices from com­pa­nies that believe in some­thing beyond sim­ply max­i­miz­ing profits.”

Posted by AP News on Feb 2 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.