For Facebook IPO, some suitors wary of the big dance (+video)

This week's Facebook IPO, valued at an eye-popping $100 billion, is among the most-anticipated initial public offerings ever. But some analysts wonder about Facebook's business model for the future. General Motors pulled its ads this week, and insiders plan to sell lots of shares.

By , Staff writer

  • close
    An electronic screen (r.) on the front of the Nasdaq stock market flashes advertisements in New York's Times Square May 17. The Facebook IPO is one of the most anticipated initial public offerings in years. The firm is likely to have an estimated market valuation of $100 billion when its shares begin trading on the Nasdaq on Friday.
    View Caption

It’s prom season – and the Internet behemoth Facebook is all dressed up and ready to dance with both Wall Street and small-time investors. Its much-anticipated initial public offering, now valued at some $100 billion, is finally launching this week; but as the social media giant tries to sell itself as the hottest date in town, signs are that not all suitors are equally smitten.

Just this week, one of the nation’s largest advertisers, General Motors, announced that it is pulling its $10 million in advertising on Facebook, saying it was not cost-effective. Facebook also recently announced an earnings slump in the first quarter. That combination, along with findings such as a recent AP-CNBC survey of Facebook users revealing that 54 percent wouldn’t buy goods or services through the site, has some analysts wondering if Facebook co-founder and chief executive officer Mark Zuckerberg is about to stumble in his bid to turn his online community of nearly 1 billion users into an even bigger business, publicly owned.

Facebook may be the BMOC, but the valuation of the company leaves little margin for error, says Andreas Scherer, managing partner at Salto Partners, a Washington management consulting firm and a former executive at both AOL and Netscape.

Recommended: Briefing Facebook IPO: five things to know before buying the stock

“From here on out, Facebook will have to execute its growth strategy with perfection,” he says, adding that the social media phenomenon is in an early stage. “Nobody has good metrics that sufficiently explain what triggers a buying decision,” he says, noting that the industry is searching for a better model to explain online buying. 

Still, Facebook this week boosted the size of its offering by 25 percent, now at 421 million shares, and raised its price range from a high of $35 to $38 a share – moves that suggest that the company is not too worried about weakening demand for its IPO.

But Wednesday’s news that a number of the original venture capitalists who privately funded Facebook plan to sell an unusually high percentage of their shares in the company – up to 50 percent – does not bode well, either, adds Mr. Scherer. “It does not suggest confidence in the company, say, even a year from now." 

Facebook did not return a request for comment, but the firm did generate some $3.7 billion in revenue for 2011. The outlook for this year is $6.1 billion – a 65 percent increase, the Los Angeles Times reports, citing research firm EM Marketer Inc.

However, the company faces the same issues as all social media as it navigates the new ad landscape, says Rita Gunther McGrath, associate professor at Columbia Business School in New York.

“Facebook will never be able to monetize its reach and access if it can’t raise the game on the quality of advertising on the site,” she says via e-mail. As a business consultant, she adds, “I get weirded out when I get ads [such as]: 'Female consultant? Click here to learn the 7 secrets of ...,' or, worse yet, 'Are you a woman business owner?' ”

"It’s also tedious to be bombarded with ads for products one is not in the market for, that are a poor fit for what you do, or [that] are just plain completely irrelevant,” she says.

Facebook faces an uphill battle in monetizing users via advertising because of the underlying culture of the site, says Thomas Way, a computing sciences professor at Villanova University in Pennsylvania. “Advertising on Facebook just doesn't work. It isn't Google, where people are searching for specific things. On Facebook, people are reading about what their college girlfriend's eldest daughter did over the weekend. Zzzzz as far as advertisers are concerned,” he writes in an e-mail.

However, Facebook’s challenges, inherent in an emerging marketplace, pale in comparison to the ones it faces as the new mobile era dawns, says Russ Lange, cofounding partner of the marketing consultancy CMG Partners. “The mobile phone is the great equalizer.”

Facebook does not yet support ads on mobile devices, he says. Its current model of simply shrinking existing ads into the mobile screens is not a viable approach, he adds.

“They could totally fumble this transition," he says. “Five years from now, we could see Facebook being the next Yahoo story.” On the other hand, however, he notes that Mr. Zuckerberg is only 28 and “has a lot of time in front of him.” Beyond that, “he has so many assets, from the nearly billion users and all the wealth of connections and interactions that represents.” 

Share this story:
 
 
Make a Difference
Inspired? Here are some ways to make a difference on this issue.
Follow Stories Like This
Get the Monitor stories you care about delivered to your inbox.
 

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...