Facebook’s IPO: What Does It Mean For…?

Jaimy Szymanski, Zak Kirchner

Altimeter Group Researchers Visit Facebook HQ on Jan. 25, 2012

Over 800 million active users – more than half of whom log in on any given day and interact with over 900 million “objects” (pages, groups, communities, etc.). Over 250 million photos uploaded every day, over 70 languages on the site. The stats go on and on, and anyway you look at them, the numbers are huge.

How can Facebook grow bigger still? That’s what we’re waiting so see as the tech world – heck, the world at large – holds it breath for the biggest IPO since Google went public in 2004.

There’s practically consensus that Facebook will go public in June, meaning an announcement (and a prospectus) are almost imminently forthcoming. This has naturally sparked conversation among Altimeter Group analysts (notably Charlene Li, Jeremiah Owyang, Brian Solis and myself) as we discuss and debate the implications of the Big Event, and work to come up with clear answers to the many questions we’re being asked by journalists working on what, outside of the presidential election, will be one of the biggest stories of 2012.

Here are some of our answers to the many “will this happen?” and “what does it mean..?” questions we’ve been fielding from the media regarding Facebook’s IPO:

A Literal Facebook Wall

What does it mean….to Facebook employees? There will most certainly be retention issues. Some key employees will quit. They’ll travel, or buy houses and cars with newfound wealth.  It will also increase the already fierce talent war with tangible value. Facebook will attract different employees, while early innovators who value a start-up culture will go elsewhere.  Expect to see a Facebook Mafia of investors begin to emerge.  Still others will spin off and form new companies. This has big implications for future innovation. Facebook may face some short term losses, but the tech industry will see an infusion of new capital and new ideas.

What does it mean….for future IPOs? Will Twitter and [fill in the blank] go public right away? If Facebook’s IPO is successful, a rising tide will likely raise all boats. But Facebook has built a real business and has a solid advertising model. It’s already an enormous company. Twitter (and others) is at a very different phase in its lifecycle.

How is Facebook’s IPO different from Web 1.0 and the dot-come bubble? There are real business models here, with real revenues.  

How will Facebook’s IPO be influenced by recent, unspectacular IPOs, such as Groupon or Zynga? Facebook is an enormous, global company,  the proverbial 900-lb. gorilla. Facebook’s IPO is more analogous to Google going public and not at all comparable to smaller players in the tech space. It is, however, important to note that many, many smaller companies are part of a much larger Facebook ecosystem. This includes ad agencies, technology firms, analytics firms, mobile players, brand marketers, social commerce providers, media companies and a myriad of players (such as Zynga, itself a Facebook partner) with a business model directly coupled with Facebook’s API. When looking at Facebook’s revenues, it’s critical investors understand the difference between advertising revenues, that flow directly into Facebook’s coffers, and marketing spend that benefits the Facebook ecosystem, but not directly into Facebook itself.

What’s to stop Facebook from imploding, as MySpace did? MySpace remained static. Facebook continues to innovate, and to push audience beyond where they are comfortable, often to great success. Not so long ago members had to have a .edu address to join, remember? A hue and cry was raised when Facebook opened to everyone. In a conversation today at Facebook headquarters, spokesman Brandon McCormick said the more users complain about new features, the more data reveal they’re actually using those features more. “We’re a social network,” he said, “we have a natural feedback mechanism. People use our product to complain about our product. People hated the Newsfeed when we launched it, now it’s the core of how they use the product. If we changed everything the second they started complaining, we wouldn’t have the data.”

Courageous — and based on hard data. It’s never uninteresting to keep an eye on Facebook, no more so than now. We’ll continue to watch and to share our thoughts on Facebook’s IPO.

And we’re always happy to share our observations with the media. Get in touch with us at press[at]altimetergroup.com



  1. The real issue for Facebook is that it isn’t really a media platform it is actually much better understood as an infrastructure. Like a mobile phone network, it doesn’t have an audience, it has users. The problem is that its business model and current valuation is based on the assumption that it is a form of media – i.e. a way of reaching an audience, whereas in reality Facebook is a tool that allows the ‘audience’ to reach each other.

    The way to work out a realistic valuation for Facebook – and therefore something to try and derive when it publishes its prospectus – is to determine its true marginal costs, i.e. how much does it cost to provide the infrastructure to service each additional user. Note, these costs are not the same as the costs Facebook elects to incur to attract marketing directors. Once you know this, you can estimate its long-term sustainable revenue projections, because basic market and economic theory has proven that, in a functioning market, a business cannot generate marginal revenues which are significantly greater than marginal costs. I suspect that if you do this, you will come up with a revenue projection that is massively short of supporting the offer price Facebook will be looking for.

    Facebook is obviously operating in a highly distorted market at the moment because no-one has worked out the model to value it correctly, nor does it have any direct competitors. But these conditions won’t last, and anyone investing in Facebook will need to take a guess on how long this ‘honeymoon’ period is going to last.

    More on this here http://www.huffingtonpost.com/richard-stacy/facebook-google-lack-of-social-consent_b_1028683.html


  1. [...] Cross-posted from the Altimeter Group blog. [...]

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