Friends and colleagues have asked me my opinion about the coming Facebook IPO. Here it is, as the first post in Hello, TypePad's new series, "If you tell a story or have a conversation twice you should have blogged it." Allow me to start with this insightful post by Chris Dixon about Facebook’s business model:
The key question when trying to value Facebook’s stock is: can they find another business model that generates significantly more revenue per user without hurting the user experience? (And can they do that in an increasingly mobile world where display ads have been even less effective.) Perhaps that business model is sponsored feed entries, as Facebook seems to be hoping (along with Twitter and perhaps Tumblr). The jury is still out on that model. Personally, I have trouble seeing how insertions into the feeds aren’t just more prominent display ads. You still have to stoke demand and convert people from non-purchasing to purchasing intents. A more likely outcome is that Facebook uses their assets – a vast number of extremely engaged users, it’s social graph, Facebook Connect – to monetize through another business model. If they do that, the company is probably worth a lot more than the expected $100B IPO valuation. If they don’t, it’s probably worth a lot less.
I wonder if it's not too late for Facebook "to monetize through another business model." Sheryl Sandberg shows a graph during Facebook's IPO roadshow video (which is fun and exciting to watch, I hope it comes back on youtube), in which she shows how small a percentage of ad dollars have come on-line, positing that eventually all of these "off-line" dollars will migrate on-line. A pessimist might point out that this is exactly what we were hearing from Yahoo! in 1996, and a lot of other companies since then.
Facebook may make the best run of it yet, but it feels a little like betting on Duke or Kentucky to win the NCAA's every year. Sure, they have great programs, people and culture, but it is bad business to bet against the field. One of Facebook's genius moves was to use the Facebook Connect API to get a piece of the field by lending their infrastructure to others, but that is still an evolving landscape. If indeed Facebook's revenue model comes from their exploitation of the social graph to serve more relevant ads, I believe other app companies, not to mention news and magazine companies, are very quickly going to stop participating in that social graph. If you think this is unlikely, consider that Facebook has already fired the first shot in this battle by discouraging users from leaving facebook.com, even to other sites that send data back to Facebook about their audience. Anil's post is a few months old, but they are still doing this (it happened to me yesterday).
Does this sound crazy to you? Google Plus, while still a punchline, is actually getting better quickly. And Google has already done a good job of creating a good user experience around ads and watching youtube videos (although, sadly, not much else). The good news for Google is that watching youtube videos may turn out to be what a lot of people spend most of their time doing, and a "second screen" experience on a mobile device which watching videos or sports on TV or a computer is a nascent, but extremely promising product model.
So the short answer is, I do not recommend buying Facebook stock. I think they will build a profitable, successful company, but i don't think it will be at the scale they're advertising. Techcrunch put together a list of things that could "kill" Facebook. It's a good list with three caveats:
- Nothing's going to kill Facebook. AOL and Yahoo! are still around and probably will be forever. Facebook will be too.
- I don't think hiring young or rising talent will be a huge problem for Facebook going forward. In addition to the salaries they can offer, Facebook has a legendary culture which talented engineers will want to participate in.
- And now the much more boring thing that Techcrunch left out: People will think it's creepy that Facebook is sharing so much of their stuff, and they won't be able to build an ad model that is more fun or lucrative than watching YouTube while tweeting.
I should also note I'm looking forward to reading PandoDaily's Facebook IPO guide. I think it's a good time to be a geek.