Editorial

Sorry, Facebook haters: It's not going anywhere

Facebook’s IPO caused a divisive reaction from individuals in the tech community. Unfortunately for the company’s detractors, it’s not going anywhere for quite a while. Its stock debuted Friday at $38, making Facebook the highest-valued American company ever at the time of an IPO, with a market capitalization of $104.18 billion.

Things got tumultuous after that, with the stock going as high as $45 before settling back down at $38.23 at the end of regular trading. It’s not exactly clear what led investors to bolt so quick, but part of the crazy trading day may have to do with the sheer amount of Facebook stock provided to the public. Roughly 20 percent of Facebook’s stock was made public; Google, by comparison, only offered about seven percent of its company at its IPO.

Yet for all the company’s success, there’s still a vocal group which claims both the company and its stock are “all hype.” What these people are ignoring is the fact that Facebook’s valuation is actually in line with what Google was valued during its initial stock offering relative to its revenues and profits at the time.

The recent financial history of dot-com IPOs

When looking over the financial information of recent IPOs for Internet companies, it’s perplexing why anyone would think Facebook’s stock would be considered “risky” for the short-term.

One of the most popular views about Facebook on technology sites – Neowin included – is that Facebook’s stock will usher in another dot-com bubble burst, similar to the bubble that burst in 2000 and caused a collapse of the stock market. Yet of all the recent Internet companies to begin issuing stock over the past few years, Facebook’s business model and financial situation are by far the most sound. If there is another dot-com bubble in the near-future, it will have nothing to do with Facebook and everything to do with other recent IPOs.

Groupon launched its IPO in April and garnered a market valuation of $11.2 billion, despite having never posted a profit. In fact, the company just revealed its first profitable quarter ever earlier this week, where it posted a mere profit of $16.3 million. Groupon’s business model – or lack thereof – was roundly criticized before its IPO, yet it still had one of the largest IPOs, and one of the largest valuations, in recent years.

Zynga, which launched its IPO in December, has business model more sound than Groupon’s, but at the same time the company relies heavily on Facebook’s success for its own. While Zynga recently launched its own gaming portal, the overwhelming majority of its users still come from Facebook. Despite this unheard of reliance on another company, Zynga’s market capitalization was roughly valued at $7 billion.

Unlike these companies, Facebook has multiple revenue streams. The majority of the company’s revenue comes from advertisements – the company is the largest Internet display advertiser in the world – but it also takes a cut of Zynga’s profit, as well as other companies which tie into Facebook. Additionally, Facebook’s actively seeking new revenue sources, unlike Zynga and Groupon, which have largely been standing pat.

Facebook’s recently revealed plans to expand its revenue stream to new, potentially lucrative markets. Earlier this month, the company announced its new app center, which will provide users with purchasable apps – yet another revenue stream for the company, albeit one that will probably take a while to fully monetize. Facebook’s mobile apps will also soon be monetized, ensuring that Facebook will increase its revenue yet again. This is significant as more and more users are primarily using mobile devices to access Facebook and other social media outlets.

Misleading charts have also attempted to pit Facebook against Google in terms of success prior to their respective IPOs. A key piece of information missing from these discussions is that Facebook showed no real interest in monetizing its platform for the majority of its early years. It wasn’t until after Sheryl Sandberg joined the company as chief operating officer in 2008 that it had a legitimate business strategy. Its advertising platform was released later that year, and it took less than two years for the company to become profitable. Since then, its profits have skyrocketed.

When Google filed for its IPO, the company had a $961.8 million in revenues and $105.6 million in profits for the previous year. Facebook, by comparison, posted revenues of $3.71 billion and a profit of $1 billion for 2011, the year prior to its IPO. Google’s market valuation upon its IPO was $23 billion, while Facebook’s IPO gave it a market capitalization of $104 billion. Given the company’s annual profit compared to Google’s at the time of each company’s IPO, this seems a reasonable valuation. So, for all the cries of Facebook being massive overvalued: history disagrees.

Others have pointed to the fact that companies with a similar market capitalization have far higher profits. Well, yes. That’s entirely how the stock market works: historical patterns have shown what a company is worth, so eventually that company will settle at its true value. Facebook is a relatively new company that is still growing and has the potential to eventually be an advertising juggernaut. Its IPO is more about potential than current value, like most IPOs.

Why advertising on Facebook will be a massive success... eventually

Much has been made of General Motors’s recent decision to stop advertising on Facebook. But was the company even advertising in a strategic manner, or was it just throwing crap at the wall and hoping it would stick? People who actually run Facebook marketing campaigns say it’s the latter. One advertiser even classified GM’s advertising campaign on Facebook as “mental,” as the company wasn’t even attempting to interact with Facebook users. 

Traditional marketing practices can’t simply be applied to a new platform – expecting to see results by doing what works on other platforms is, in fact, mental. With the advent of every new media platform, companies slowly begin to learn what works and what doesn’t. Going all-in and refusing to learn a platform is never successful, as GM’s just proven. Facebook already has a large amount of information on its users, information that users willingly share. Companies have to harness this data by using Facebook to continue information sharing and social gathering – the entire purpose of social media. Simply posting ads about having a sale serves no purpose, given how Facebook is used. Instead, companies have to create discussion through their advertisements.

General Motors doesn’t merely have social media problems, however. The company also announced it would stop airing commercials during the Super Bowl, indicating advertising problems beyond Facebook. Ford, one of GM’s primary competitors, took to Twitter to chastise GM, saying the company simply didn’t know how to advertise on social media. The company said that, unlike GM, it is placing a heavy emphasis on social media platforms.

Pages on Facebook are already a hot marketing and public relations tool. A smart company will actively gather information about what its customers like or dislike based on what users have said on the company’s brand page(s), then use that information in social media advertisements. General Motors didn’t do this, which illustrates that the company doesn’t know how to advertise on social media platforms.

Social media advertising is not a replacement for traditional advertising, just as advertising on Google is not a replacement for traditional advertising. Instead, both forms of advertising serve to complement traditional advertising. With Google, companies can advertise to someone looking for information regarding your product or service; with Facebook, companies can advertise to someone who has already expressed interest in a particular product or service (or related products or services).

All of this doesn’t mean Facebook’s advertising methodology is perfect. It’s not. The company needs a more integrated experience – something that works better with how people use Facebook. Display ads probably aren’t going to be the future of advertising on the platform, but for now they serve a decent purpose. More natural advertising has to exist, and given Facebook’s history, it’s reasonable to assume the company will continue working on advertising methods.

The fallacy of the MySpace 2.0 argument

The primary argument against Facebook is that it will be the next MySpace – a social media empire that quickly falls from grace when a real competitor emerges. But the only similarities the two have as a business is the fact each has been the top social networking site at one point in time. MySpace was sold to Rupert Murdoch’s News Corporation, a company that had no idea what to do with MySpace and never added any new features to the site. Facebook, conversely, is run by its founder (who doesn’t appear to be leaving anytime soon) and constantly receives new features and updates.

Facebook has over 901 million active users. Put simply, roughly one person for every seven-to-eight people on the planet is actively using Facebook. In the United States, the numbers are even more daunting: over 40 percent of the population of the U.S. is estimated to have a Facebook account. No other company on the planet can make a similar claim. MySpace, at its peak, had 75.9 million active users. So don’t count on Facebook suddenly crumbling.

The most recent competitor to Facebook, Google+, has a sparse active user base, according to a recent study. Google boasts that its social media site has over 170 million total users (the company has refused to release data regarding how many active users it has), but the study claims that a large percentage of users don’t continue to use the social network after their first engagement. Of a random sample of 40,000 public users, 30 percent of users who made a public post never made another, according to the study.

Even ignoring the statistical data, users have very little reason to switch to Google+. The site has proven to be creatively bankrupt, providing almost no features that aren’t already offered by Facebook, Twitter or another social media site. Without a reason to switch to Google+, Facebook users are unlikely to join the new platform and abandon their friends on Facebook.

Ironically, the quickest way to gain users on a social networking startup is to use Facebook’s open graph, as Pinterest recently proved. The site recently became the third-largest social network on the Internet, surpassing Google+. This was largely due to the fact that users could interact with the site through their Facebook account. Other companies have also found immediate success through Facebook’s open graph, such as Spotify.

If Facebook is going to be overtaken, it’s going to be by an upstart that is willing to take risks, willing to innovate and unwilling to sell itself. Mark Zuckerberg and company grew Facebook to the site it is today through an unwillingness to compromise goals for a quick cash-in. Since then, the Facebook has continued to add features to the site at a seemingly impossible rate, given the current size of the company.

The future of Facebook

Will Facebook be a success ten years from now? That’s hard to say, given the volatility of Internet businesses. But it seems the company will thrive for another year or two, at minimum. An active user base of 901 million doesn’t just erode overnight, after all.

As a company, Facebook is more ready than Google was at the time of its IPO. When Google filed for its IPO in 2003, the only major revenue stream it had was advertisements. Facebook has already diversified its revenue streams, giving it an advantage Google didn’t have. For the near-future, Facebook’s stock is likely to remain relatively flat, barring any unforeseen events, such as Zuckerberg leaving the company or a market collapse. 

The possibility that Facebook’s value will plummet somewhere down the line is a very real one. If the company doesn’t continue to advance its advertising methods and can’t find a good way to advertise to mobile users, then yes, it will fail in time. But Facebook’s already proven its intent to innovate and find additional sources of revenue. The company’s size has bought it another year or two – it’s a platform that reaches a large amount of people, something that will always be important to advertisers.

As a social network, Facebook continues to innovate and avoid the mistakes that cost MySpace its supremacy. It hasn’t overrun the site with ads, it hasn’t been complacent with its position in the industry and its founder has remained hands-on and continued the site’s expansion into relevant areas.

It doesn’t matter whether you like or dislike Facebook. The company has proven itself to be both a business that should be taken seriously and a social media network that won’t go down without a fight.

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54 Comments

Commenting is disabled on this article.

This article doesn't explain how Facebook can grow enough to actually beat the $38, when it is already overvalued. Facebook might be around for a decade, but if it doesn't grow (a lot), investors don't care.

"The possibility that Facebook's value will plummet somewhere down the line is a very real one."

Yup, incredibly real. Like more and more each day after their botched IPO.

Really? I just had a ****ing contest with a dork the other day about this. I said I have better things to do than talking to friends in 10+ years. I got something like 10 likes on that comment. Thank you to all that supported me. If you like it use it. I don't care. I'm simply giving my opinion that I don't like it.

butilikethecookie said,
Really? I just had a ****ing contest with a dork the other day about this. I said I have better things to do than talking to friends in 10+ years. I got something like 10 likes on that comment. Thank you to all that supported me. If you like it use it. I don't care. I'm simply giving my opinion that I don't like it.

Better things to do, or better ways to talk to friends? I sincerely hope you still have friends you want to talk to in 10 years.. the older you get, the more you need 'em.

Hey guys, this is not the actual value of FB. Market capitalization could be used as a proxy for the public opinion of a company's net worth and is a determining factor in some forms of stock valuation.
If they try to sell all their shares it they may get this, less or nothing.

I used to be one of those people who thought it was lame to use Facebook. Then I reevaluated my own nerd; posting on forums, IMs, IIRC, and various other websites. I quickly realized that talking to my friends through Facebook wasn't worth raging over.

Figure 8 Dash said,
I used to be one of those people who thought it was lame to use Facebook. Then I reevaluated my own nerd; posting on forums, IMs, IIRC, and various other websites. I quickly realized that talking to my friends through Facebook wasn't worth raging over.

I agree. IM's are actually dead for me. Unless you count the Facebook feature for this. No one I know is on those but not on Facebook. So it doesn't make sense to use them for me.

E-mail is getting there too. I love being easy to reach through Facebook private messages with zero spam. E-mail has become my disposal for confirmation mails and automated mails. And conversations on a "professional" level, i.e. support mails and the likes with people I don't know.

That's probably the best with social networks. That they have finally made e-mail fade into the background.

sava700 said,
It won't last long... AOL didn't even last as it lost over 80% of its value over its life from peak

Not sure what AOL have to do with this?

If the only thing in common is "big IT company", I can on the other hand list IBM or Microsoft who are still lasting.

We're on unproven ground here. The only other fairly big social network in the past more like Facebook that I can think of is MySpace. But that still just had a shade of Facebook's features and involvement by the public at large. MySpace still didn't give you real world issues like missing events if you weren't part of it. A factor others have mentioned have given them problems when leaving it. You still weren't basically expected to be there.

Edited by Northgrove, May 21 2012, 6:56am :

Totalaero said,
Imma save this link so when Facebook fail and Twitter becomes the #1 social site I will be like derp remember this.

gonna be the oldest bookmark in history. lol

Totalaero said,
Imma save this link so when Facebook fail and Twitter becomes the #1 social site I will be like derp remember this.

Twitter is quite useless personally. Heck there's no instant messaging or photo album sharing, which are my two primary uses of Facebook.

Why do people always mention Myspace but fail to acknowledge the massive downfall of instant messaging mainly Windows Live Messenger. This fall had such a big effect that Microsoft has been forced to buy Skype which is basically the only Instant messenger to be growing. Facebook might be able to update themselves to new standards but there will certainly be a time where people will become bored of their main method of communication. Would facebook adapt to a totally new method of communication in 5-10 years from now? Or will it fall with the likes of Instant messaging which has mainly been replaced by Facebook, VOIP and Texting.

My perfect Social network the now would be Skype, merged with Twitter and integrated more into iOS, Android and WP7.

Gaffney said,
Why do people always mention Myspace but fail to acknowledge the massive downfall of instant messaging mainly Windows Live Messenger. This fall had such a big effect that Microsoft has been forced to buy Skype which is basically the only Instant messenger to be growing. Facebook might be able to update themselves to new standards but there will certainly be a time where people will become bored of their main method of communication. Would facebook adapt to a totally new method of communication in 5-10 years from now? Or will it fall with the likes of Instant messaging which has mainly been replaced by Facebook, VOIP and Texting.

My perfect Social network the now would be Skype, merged with Twitter and integrated more into iOS, Android and WP7.

This is exactly why I don't use Facebook anymore. The ads I can ignore, the dumb-friend requests I can block, and for the folks I want to interact with it was pretty simple--but all that aside, SMS/MMS is faster, easier, and more direct. Why do I need 40 friends on Facebook when I can have them all in my phone? They all have phones too (well for the most part). If SMS/MMS is too fast, I still have good ol'fashioned email ;-)

shakezula said,

This is exactly why I don't use Facebook anymore. The ads I can ignore, the dumb-friend requests I can block, and for the folks I want to interact with it was pretty simple--but all that aside, SMS/MMS is faster, easier, and more direct. Why do I need 40 friends on Facebook when I can have them all in my phone? They all have phones too (well for the most part). If SMS/MMS is too fast, I still have good ol'fashioned email ;-)

I use Facebook primarily for IM, and also for picture sharing. EVERYONE is on Facebook chat. If I need to talk to a friend at school about a project but I don't have his phone number... Facebook.

And uploading your pictures to Facebook is way easier than emailing all of them. Then you can just say "Check my facebook on the Mt Lemmon August Riding album", and they can see your pics instantly.

Sure other services can do this, but the fact is that nearly everyone uses Facebook, and therefore it's the easiest and the best.

andrewbares said,

I use Facebook primarily for IM, and also for picture sharing. EVERYONE is on Facebook chat. If I need to talk to a friend at school about a project but I don't have his phone number... Facebook.

And uploading your pictures to Facebook is way easier than emailing all of them. Then you can just say "Check my facebook on the Mt Lemmon August Riding album", and they can see your pics instantly.

Sure other services can do this, but the fact is that nearly everyone uses Facebook, and therefore it's the easiest and the best.

What about sending a link to share a folder using Skydrive? Easier, faster and FB and its minions will have no clue of what you share and YOUR pictures will not end in some servers that are beyond your control forever.


Facebook has over 901 million active users. Put simply, roughly one person for every seven-to-eight people on the planet is actively using Facebook

I thought that was number of accounts, not active users? The number of active users is probably less than half that. And by all accounts, that number has plateaued.

simplezz said,

I thought that was number of accounts, not active users? The number of active users is probably less than half that. And by all accounts, that number has plateaued.

No, it's the number of active users per month.

Anthony Tosie said,

No, it's the number of active users per month.

Does this number of active users use Facebook's main services (i.e. the main site / main purpose of FB)? Or does the number also include users only using the authentication API of Facebook - who are forced to sign up to use a 3rd party service (e.g. Spotify, Soundrop, some comment systems etc.)?

simplezz said,

I thought that was number of accounts, not active users? The number of active users is probably less than half that. And by all accounts, that number has plateaued.

Where does it say half (or even less than half) of this is the number of active users and that this number of active users have plateaued? You can't just make things up to support a point, lol.

Of all Facebook users I have in my friend list, I'd wager that around 10-20% at best are inactive. Whatever "inactive" means. For those having stopped using FB altogether, the number is approaching 0% there.

Edited by Northgrove, May 21 2012, 6:12am :

"Sorry, Facebook haters: It's not going anywhere"

so said some short-sighted idiots about aol, yahoo, etc. facebook will be gone faster than these has-beens. internet social networking is a fad that won't last.

Albert said,
"Sorry, Facebook haters: It's not going anywhere"

so said some short-sighted idiots about aol, yahoo, etc. facebook will be gone faster than these has-beens. internet social networking is a fad that won't last.

Yes, but I think you'll find AOL and Yahoo both rank in the top 10 largest Internet companies. And they've both been there for well over 10 years.

Albert said,
"Sorry, Facebook haters: It's not going anywhere"

so said some short-sighted idiots about aol, yahoo, etc. facebook will be gone faster than these has-beens. internet social networking is a fad that won't last.


A fad with more users than the population of USA. A pretty impressive fad.

AOL and Yahoo haven't even done social networking so I'm unsure how you connect these? Because company is big?

ive alwayz had a intrest in the stock market and thus, for 38 bucks (excluding taxes from my online broker) I said "what the hell"............but as soon as it raises to a amount somewhat decent, Im selling.

metro2012 said,
ive alwayz had a intrest in the stock market and thus, for 38 bucks (excluding taxes from my online broker) I said "what the hell"............but as soon as it raises to a amount somewhat decent, Im selling.

Lol and you probably pay $8 just to buy/sell that single stock... even if Facebook's stock rises, you're just going to break even or possibly even lose money! Buy more than just one!

xpclient said,
I am only going to use it till they force the Timeline on everyone.

I'm very much against the Timeline look, as well as some of the other things that Facebook is planning for the near future. However I can't stop using Facebook completely as I know too many people that will continue to use it. In a perfect world, myself and all my friends from Facebook would switch to Google+, but those of my friends that tried Google+ very quickly went back to Facebook.

Intrinsica said,

I'm very much against the Timeline look, as well as some of the other things that Facebook is planning for the near future. However I can't stop using Facebook completely as I know too many people that will continue to use it. In a perfect world, myself and all my friends from Facebook would switch to Google+, but those of my friends that tried Google+ very quickly went back to Facebook.

Maybe someone can come up with a Facebook client that clones the current neatly organized layout.

what?.

I am reading a completely different story. Facebook started with an inflated value ($38), then it raised for a couple of hours, then it dropped considerable. It was saved by bankers, however it was close to end with a value lower than $38.

Facebook tried to mimic the dot com bubble and failed. Remember, here we are talking about a business and not a social network.

Conclusion, Facebook's IPO can be resumed as "saved" instead of "stable" or "success". The question is, "for how long?"

Magallanes said,
what?.

I am reading a completely different story. Facebook started with an inflated value ($38), then it raised for a couple of hours, then it dropped considerable. It was saved by bankers, however it was close to end with a value lower than $38.

Facebook tried to mimic the dot com bubble and failed. Remember, here we are talking about a business and not a social network.

Conclusion, Facebook's IPO can be resumed as "saved" instead of "stable" or "success". The question is, "for how long?"


Facebook didn't try to mimic anything. They did the exacty opposite of what most companies do: they made sure there were enough shares to meet demand instead of artificially driving up price by offering a very small amount of shares. In fact, they may have over-offered shares. Offering 20% of your company at IPO is a lot.

Also: trading was up after-hours.

Anthony Tosie said,

Which is up from where it closed.

You might want to check how high, in percentage of course, previous IPOs closed the first day of trading............. and after a while falled....... like Groupon and Zinga......

I think current success and failure is no way to guess the future.

Speculating on future events is exactly how the stock market works and how people make/lose money.

Whilst I don't think Facebook will disappear as a company, I suspect long term it will take a huge hit on the share price, much of its current valuation is based on huge positive speculation and if that doesn't come in the next couple of years then it will have to drop. Googles price was the same, very high presuming good future profits and Apple's price is also currently inflated on the speculation it will continue to grow (but that has dropped 20% in the last couple of months).

I hope it continues to be successful throughout my lifetime, unless something better comes along of course. Wishful thinking, I know Facebook is currently my favourite service, and I believe they are doing brilliant things.

I don't know, Social network sites pop out every day. The fact that they survived this long would suggest that they won't go away soon, otherwise it only takes one to bring them down.

TRC said,
Why should anyone care, if you don't like it don't use it. I don't.

Me neither, however some colleagues uses it and they give my email to facebook.

Magallanes said,

Me neither, however some colleagues uses it and they give my email to facebook.

Do they give it voluntarily, or does Facebook harvest it from their smartphone?

akav0id said,

Do they give it voluntarily, or does Facebook harvest it from their smartphone?

I don't know but now, i am receiving facebook spam.

'

TRC said,
Why should anyone care, if you don't like it don't use it. I don't.

You should care if you bought Facebook's stock.

***

"An active user base of 901 million doesn't just erode overnight, after all."

No, the user base won't erode so fast... But stock prices will.

Magallanes said,

I don't know but now, i am receiving facebook spam.

And how is that different from SPIM (IM spam - Yahoo Messenger and AIM are especially prone to this)?

It's pretty much the same perps, as well (I kill multiple birds with one stone by tying my Facebook and YM accounts together - that way, SPIM gets thrown into the ringer with any Facebook-sourced spam, with the lot being sent to the anti-spam units of Yahoo and the FTC). There *is* a lot of hostility toward Facebook's IPO - mostly from hedge funds that sold short (that is largely why NASDAQ threw a hissy-fit the day of the Facebook IPO) because they hate Internet stocks. However, despite that, Facebook was actually one of the few bright spots in what was mostly a down market day globally. All you FB-haters - name a publicly-traded stock that actually did BETTER than Facebook did.