Why the Facebook IPO is the worst in over a decade

It’s true.   According to Bloomberg, a veritable authority in all things financial, the Facebook IPO was the worst IPO in more than a decade.  CNET has a detailed overview on this – http://news.cnet.com/8301-1023_3-57441687-93/facebook-worst-ipo-flop-of-the-decade-bloomberg-says/

Beyond the easy answer that the business lacks a solid business plan or that Mark Zuckerberg is too young to run a public company, there are some fundamental reasons the IPO is off to such a rocky start and the explanations outline an interesting insight into the future of technology.

Here are the principle reasons that Facebook will struggle as a public company:

  1. Facebook makes money through advertising and ADs are not served on Facebook Mobile Apps
    Have you noticed on your iPhone or Android or iPad, there are no ADs being served when you’re cruising your favorite social network?  That’s right.  The only place ADs are served via Facebook are through the Web interface.  The fact is that right now mobile traffic still represents a small overall percentage of the way we access the Web.  http://www.smartinsights.com/wp-content/uploads/2012/01/global-mobile-usage-2012.jpgHowever, all statistics show that by 2014, mobile devices will overtake desktop devices as the avenue to access the Web. Facebook Smartphone Use In a nutshell, if people are accessing Facebook through mobile devices and no ADs are served, that means a declining revenue stream – not good on Wall Street.  What’s more, there is a general problem with advertising on mobile devices because mobile devices have very limited real estate to present ADs.  Most people rarely click on ADs on desktop computers with large screens.  This does not bode well for clicking on ADs on very small screens like phones and tablets.

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  2. Facebook has yet to present a viable way to monetize their tremendous user base and platform use

    Facebook User Growth

    While the 900 million users and average of 51 minutes of use per day is remarkable, it means very little if there is no plan to monetize this usage.  I think I speak for all of us that we would drop Facebook faster than a New York minute if they sold our information to third parties.  This makes me wonder how they can build a sustainable model.  If they don’t sell our data and usage statistics (which is certainly the most valuable asset Facebook owns), and we know the AD revenue is in jeopardy, then where will Facebook find revenue?  Wall Street has not received a good answer.  Consider that Google has added significant paid services to their core competency as a search engine.  Google goggles demonstrates additional revenue source for GoogleSuch services include paid email and hosting, development licenses for various forms of enterprise software, and most recently products like the Google Glasses and even a self-driving Google car.  Is Facebook up for such diversification?

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  3. Mark Zuckerberg has a long way to go
    There is no doubt that Mark Zuckerberg will go down in history as one of the most brilliant young minds of our time.  However, to this point, he has also proven to have questionable ethics, shaky leadership, and a lack of respect for institutions that have been around 8x longer than he’s been alive. Mark Zuckerberg no respect for Wall Street outfit Like so many young tech entrepreneurs of our time (Steve Jobs, Bill Gates), Zuckerberg is making it up as he goes and that’s bound to ruffle feathers and cause some offense.  But given the inflated expectations and the tremendous responsibility managing a community of 900MM requires, the criticism on the young founder is that much harsher than his predecessors.  Hopefully Zuckerberg picks up a suit or two and at least tries to play within the framework is now just a part of, despite his $20B net worth.  Actually, given the stocks’ current price of $29, that net worth is closer to $15B..
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  4. The Rules have Changed (for the better)
    One thing is certain the formula for valuation is changing for the better.  Not long ago Google acquired YouTube for $1B+ based mostly on the number of users and the staggering traffic figures.  Today, the valuation model is different.  It’s not just about the quantitative factors, it’s now very much qualitative.  That’s why the ‘quality’ of your connections on networks like Facebook and LinkedIn are so critical.  I would be less concerned with how many, but more concerned with whom and why those connections exist. 

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