Beyond the IPO: Ten Implications of a Public Facebook

By Susan Etlinger, Charlene Li and Rebecca Lieb

The run-up to Facebook’s IPO reminds me a bit of a wedding: everyone’s attention is on the big day (expected to be Friday May 18), without much regard for the weeks, months and years afterward. Charlene Li, Rebecca Lieb, and I sat down to discuss some of the implications of a newly public Facebook: on shareholders, business and Facebook itself. — SE

Whether or not Facebook’s IPO ends up being one of the world’s largest (this Washington Post article places it 6th, between AT&T Wireless and Kraft Foods), it will certainly earn a respectable position in the history of the public markets, a lofty spot for an eight-year-old company in a relatively unproven business.

We identified ten areas where we are watching Facebook closely, as an indication of its success in the future.  We picked these topics because they intrigue us, because they provoke discussion and, ultimately, because we believe they are the issues most central to Facebook’s future.

#1. Leadership
In a media frenzy in which anything (such as, for example, wearing a hoodie on a road show) can spark a news cycle, it’s to be expected that Mark Zuckerberg would have kept the lowest possible profile during Facebook’s quiet period. But now during the roadshow, on the first day of trading, and afterwards, he’ll need to step out, step up and set the tone for how he will lead this company into its next major phase. Can he pull it off?

The decision Zuckerberg must make, as a CEO who’s famous for his a “go away; we’re working on it” attitude, is whether he will use this milestone as an opportunity to cultivate his newest constituency: investors. As CEO, Zuckerberg needs to be accountable to his shareholders–not to a stock price per se, but to their faith in him. We will start to see clues to this decision during the first earnings call (a trial by fire for the CEO of any newly public company).

Of course, it’s all fun and games until there is a major hit to the stock price.  We know, generally speaking, what the triggers will be: a new, poorly received product, a privacy issue, slowing user growth–the registration statement is full of examples.  When this happens, Zuckerberg will have to demonstrate a completely new level of leadership. He’s chosen his executive team wisely in that both COO Sheryl Sandberg and CFO David Ebersman are strong, respected executives who have been through this process before. And, despite his youth, Zuckerberg has learned from previous missteps like member revolts, privacy, and Beacon.  If you still wonder if Zuckerberg is ready for prime time, imagine how you’d react if a major, highly unflattering motion picture had been made about you while you were still in your twenties. The issue isn’t whether he can avoid controversy, but how well he can quell the concerns of skittish investors.

#2. Innovation
Facebook has a hacker culture; its development mantra, “done is better than perfect,” is at the root of both its growth and its biggest failures. Given the massive number of monthly active users (901 million according to the latest released figures) the strategy has been to release product to the market and learn as it goes.

But as a public company, Facebook will need to choose whether it will continue to release products the way it has in the past or take a more cautious approach.  How will it behave when it’s not just the pundits on Twitter, but the shareholders who react?

Although they’d hate the comparison, there’s a strong role model in Google, which, even as a public company, has managed to maintain its agile development strategy. Granted, there’s always the risk of a Buzz (Google) or Beacon (Facebook), but Facebook has demonstrated considerably more focus from the start than Google.  Furthermore, the company sent a strong signal in its last quarterly statement that it will continue to make investments for long-term growth, even at the cost of short-term profits. It’s setting expectations that it’s investing for the future, not just for the quarter.

#3. Brands
Will brands buy what Facebook’s selling? Facebook is, after all, a media company, and while it has other sources of income through partnerships, brand dollars are what will ultimately make not only the IPO, but the company itself, succeed or fail. With close to a billion users, Facebook is the biggest media company that’s ever existed, in any medium, ever. Advertisers go where the eyeballs are, which is Facebook’s undisputed advantage. After that, it gets a bit trickier.

Facebook is at the vanguard of developing products that merge and conflate advertising and marketing, that blend content, conversation, paid, earned and owned media with media buys. Advertising is media buying, but those other aspects: owned media (premium brand pages) and earned media (the conversations and comments and interactions brands have with their fans, users and yes, detractors) are part and parcel of what Facebook is working to monetize. It’s still experimental. Brands are still testing the waters and are far from establishing best practices or firm models in a “brand” new environment.

#4. Data

Facebook is also in a position, thanks to its staggering user base, to possess and be able to leverage data on a scale we’ve never before seen. Likes, affinities, social graphs, recent behaviors – it’s all there, together with the basic demographic information. Again, the ability to package, parse, productize, make understandable and actionable this vast quantity of data is as formidable a challenge for Facebook as it will be for the media agencies who buy against these very new models. Facebook’s potential as a marketing data juggernaut is very real, and can potentially take advertising to new levels, if the company succeeds in making that data useful.

#5. Mobile
Most of the coverage around mobile has been focused on Facebook’s “lousy” mobile applications. But we believe this is a red herring – the core issue revolves around the slow development of mobile advertising and marketing. The S-1 says it best in the section on risks related to advertising:

  • “…increased user access to and engagement with Facebook through our mobile products, where we do not currently directly generate meaningful revenue, particularly to the extent that mobile engagement is substituted for engagement with Facebook on personal computers where we monetize usage by displaying ads and other commercial content…”

But with 85% of revenue coming from advertising as of the end of 2011, the more effective Facebook is at appealing to its mobile users, the more it risks shifting revenues from the Web platform where it can monetize users, to the mobile one where it can’t — at least not immediately.  So the real question becomes how Facebook will balance creating mobile user value against driving shareholder value.

Facebook can’t risk waiting too long before moving aggressively into the mobile space, but also needs to buy time to help mobile advertising develop. Given this significant risk, the purchase of Instagram represents $1B of earnest money that Facebook is focused on the long term.  With the war chest Facebook will have accumulated post-IPO, building a great iPad app and upgrading the smartphone experience is a foregone conclusion. The bigger issue to watch is how well Facebook can develop the mobile advertising market with that experience, in a similar way that it created social media marketing.

#6. Investors
The first earning call is always rough for a first time CEO, and Facebook will likely be no exception. But what we are watching closely is if Facebook will develop a different kind of relationship with its shareholders. The company is, at its essence, about sharing: will a newly public Facebook use its own platform to share more information with investors?  Facebook has an unprecedented opportunity to change the way that it handles investor relations. Will it take this opportunity, or will it stick with the tried and true?  We’d love to see Facebook use its own platform as a way to engage with and provide greater transparency to its newest stakeholders: the public markets.

#7. Mergers & Acquisitions
Thanks to Instagram, every venture-backed start-up has dreams of meeting with Facebook’s M&A team. Will Facebook focus on smaller acquisitions to acquire talent or smart ideas, or will it make major deals to really move the ball forward?

One of the more interesting areas of speculation lately is what would happen if Facebook were to buy Bing from Microsoft. With Google arguably its most formidable competitor, the addition of search would give Facebook advertisers a direct response medium they could not get before on Facebook. Google is, at its essence, a search company that has struggled with social. Facebook is a social company that needs search. A Bing acquisition would up the ante in a significant way between Facebook and Google.

Looks good on paper, but acquiring Bing would also be a huge distraction and a departure from Facebook and Zuckerberg’s legendary ability to focus on social sharing. A more likely scenario is that Facebook and Microsoft continue their long-term strategic partnership, integrating Bing deeply into the Facebook search experience.

Regardless of whether it buys Bing or another organization, few companies do the “merger” part of M&A well. We expect that Facebook will focus on smaller acquisitions that it can absorb and leverage quickly, while any large acquisitions like Instagram will be kept running separately, in much the way that Google ran YouTube as a separate entity for years. Again, a focus on the long term gives Facebook the ability to look at M&A in a very different way than traditional companies who much justify every single penny spent on a company.

#8. Culture
Facebook is a private company in many respects (one of which is about to change dramatically), but the internal culture has always been very open. It has invested heavily to create this open culture, and it has slowly but surely been reducing the amount of information shared internally in the run-up to the IPO.

This will only increase, as the company will now be beholden to even more securities industry regulations intended to protect investors from selective disclosure. So again the balancing act, this time between employees (and openness) and shareholders (and fiduciary responsibility). Which leads us to…

#9. Talent
Once it goes public, how will Facebook retain talent, especially top talent?  Expect to see the usual exodus as people wait to vest, then cash out (the Bay Area housing market is already bracing for impact).  But, again like Google, Facebook will retain its cachet for some time to come, and some will be motivated by the opportunity to change the world from within Facebook rather than from without. Where else can you find a platform of 900M people to try out your next great idea?

#10. Privacy
Zuckerberg has said that increased sharing is core to Facebook’s growth. But with greater sharing also come increased pressures on and threats to user privacy.

Over the past eight years, Facebook has mastered the art of trial and error when it comes to privacy. There have been huge missteps (Beacon), significant improvements (to privacy settings) and escalating tensions as the company has continually pushed its users to share more, and more often, frequently beyond their comfort zones. The company has accumulated a great deal of resilience along the way, and has tried to balance giving people a granular degree of control (at the risk of confusing them) with offering a simplified experience (at the risk of alienating them).

The addition of Timeline, and the emergence of “passive sharing,” raise the bar yet again. A few months ago I installed the Washington Post Social Reader on my Timeline. Now I know that it involves social sharing, but one day when I was in need of a little “mental floss,” I clicked on a story about Snooki’s recent weight loss. I didn’t think anything of it until a bunch of friends and work colleagues started teasing me. There it was, on my timeline with comments: “Susan Etlinger read an article: “Snooki Finally Reaches Goal Weight of 98 Pounds – But Has She Gone Too Far?” I was, frankly, mortified. I’d forgotten I was “in public,” and I am someone who is supposed to know better.

Wherever your stance on Facebook’s privacy record, privacy will continue to be a litmus test issue for Facebook. User outrage is one thing; shareholder outrage is quite another. We will watch to see how Facebook balances continued innovation against privacy. Where will Facebook stand when and if privacy issues affect the stock price — will they pull back or forge ahead?

As always, we’d love your thoughts on these issues. What are you watching as Facebook heads into its IPO?

Comments

  1. Wrong.

    The thing that makes this IPO different is Zuckerberg, who, as we saw in the Instagram acquisition, does whatever he wants.

    Except for complying with SEC regulations for financial reporting, Facebook will behave identically after the IPO as it did before. That is . . . Zuckerberg will do whatever he wants. And if you don’t like it, he’ll be happy to have you invest elsewhere. I don’t think he cares about the stock price.

    So how will a public Facebook be different? It won’t be, in any way that matters.

    • Hey Josh – I’m a big fan of your research. I definitely agree with your thoughts here. As I read through the S-1 filing, I felt as though it was reiterated time after time again that nothing would change, even if profits would suffer.

      Mark said it best in his letter to investors. “We don’t build services to make money; we make money to build better services.”

  2. Wall Street Journal, May 17, 2014. ‘After two consecutive quarters of Facebook failing to reach analysts profit forecasts, the pressure is really on Zuckerberg and his team to deliver greater value from their 1.5 billion users. Successive ad models, including the latest iteration of their mobile ad format have failed to deliver the required levels of return, yet Facebook remains central to the marketing of nearly every major brand and consumer sign-up continues at record levels, especially amongst the emerging BRIC markets. One key sector analyst points back to the largely ignored warning sign when General Motors pulled their Facebook advertising budget in May 2012, yet GM continued with their expenditure on rich content and consumer engagement through their Facebook brand pages. Many industry insiders feel Facebook will have no choice but to implement a charging structure to companies based on the level of their usage and number of likers. “What are brands going to do,” said one source, “Facebook have them over a barrel, they’ve spent years engaging with their target audience on someone else’s platform for free, now it’s time to pay up.”

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  1. [...] Beyond the IPO: Ten Implications of a Public Facebook- http://www.altimetergroup.com By Susan Etlinger, Charlene Li and Rebecca Lieb The run-up to Facebook’s IPO reminds me a bit of a wedding: everyone’s attention is on the big day (expected to be Friday May 18), without much regard for the weeks, months and years afterward. Charlene Li, Rebecca Lieb, and I sat down to discuss some of [...] [...]

  2. [...] The run-up to Facebook’s IPO reminds me a bit of a wedding: everyone’s attention is on the big day (expected to be Friday May 18), without much regard for the weeks, months and years afterward. Charlene Li, Rebecca Lieb, and I sat down to discuss some of the implications of a newly public Facebook: on shareholders, business and Facebook itself. — SE  (Cross-posted from altimetergroup.com.) [...]

  3. [...] reviews about Facebook’s IPO. If you want to read more about it I found this blog post by Susan Etlinger of Altimeter quite interesting which talks about the 10 implications of a public Facebook. [...]

  4. [...] to undergo substantial inner-workings changes after it becomes a publicly traded company May 18. A recent study by San Mateo, Calif.-based advisory firm Altimeter Group speculated on a few potential implications [...]

  5. [...] to undergo substantial inner-workings changes after it becomes a publicly traded company May 18. A recent study by San Mateo, Calif.-based advisory firm Altimeter Group speculated on a few potential implications [...]