The Facebook IPO and the Future of Social Advertising

by The Where 2 Get It Team on May 21, 2012

It finally happened – the Facebook IPO took place on May 18th, opening at $38 per share. Facebook raised $16 billion, at a valuation of $104 billion – making this the largest tech IPO in history, and the third highest valuation for any IPO ever.

Despite the massive hype surrounding the IPO, opening day was marred with technical problems and flat demand. The stock closed at $38.27 – basically the same price at which it opened, and far below the lofty expectations that some had placed on this landmark event.

Facebook’s technical issues were the result of a Nasdaq software error. The massive volume of opening day trades apparently caused a “loop” that prevented trading from opening on time. And although the errors were eventually fixed, the Nasdaq bugs contributed to the general feeling of disappointment surrounding the long-awaited IPO.

While opening day might not have been a slam dunk, ultimately it still represents a critical inflection point for the social media, technology, and marketing communities. At a valuation of over $100 billion, Facebook is now worth more than Disney, McDonalds, and Kraft. As Forbes writer Simon Mainwaring commented, “To those that said social media was a fad, Facebook is now accepting your apologies.

Facebook Revenue, Advertising, and Brands

Facebook’s $100+ billion valuation seems especially huge when you consider that the company’s 2011 revenue was only $3.7 billion. By comparison, Google’s ~$200 billion market capitalization is backed by almost $38 billion in 2011 revenues. Essentially, Google makes 10 times more than Facebook, but is only worth twice as much!

While Facebook’s aggressive valuation is obviously pinned on hopes of future growth, the Facebook advertising model is showing some weaknesses. Only days before the IPO, General Motors cancelled their $10 million Facebook advertising program, citing concerns about the site’s effectiveness.

GM isn’t the only company questioning the Facebook value proposition. The web has recently seen a few popular stories about businesses trying and failing to market themselves effectively on Facebook. The narrative is usually very similar – a business signs up, spends some cash, and ultimately fails to reach anyone relevant or generate any real business.

It’s the classic problem of social advertising. Facebook has a huge audience, and advertisers can get immediately excited about reaching almost 1 billion people. But Facebook’s users are online to socialize, not buy, and with low click through rates and conversion rates, huge reach isn’t translating into real marketing performance.

A recent Forrester post nails the issue – Facebook needs to take marketing seriously. Facebook hacker culture has long shunned the business community, preferring to focus on product. But with the market now demanding real revenues and a mature, effective advertising model, Facebook will have to start helping advertisers, not ignoring them.

Facebook and Mobile

Another major issues for Facebook’s business is mobile. While Facebook has an enormous mobile userbase (160 million unique users in April), Facebook mobile has no direct monetization.

Of course, that’s not to say that Facebook doesn’t make any money from mobile – since 90% of Facebook’s customers cross between platforms, a solid mobile presence helps to drive desktop advertising revenue.

But that tangential mobile monetization strategy isn’t enough for the future, which is likely to see mobile-social usage continue to soar, and even eventually overtake desktop usage. Most analysts are in agreement that Facebook’s mobile advertising strategy will be critical for long term revenues.

Of particular concern is Facebook’s strategy for developing markets. Fully 10% of Facebook’s users are mobile-only consumers from modernizing nations like India. And since Facebook’s penetration of developed nations like the US, Canada, and the UK is already so high, future growth depends on acquiring and monetizing these mobile-only users.

Despite the issues with Facebook’s business model, and a few opening day glitches, the IPO is a critical event in the modern digital marketing landscape. At $100 billion, social media has obviously been validated in a huge way. And now that the initial excitement is fading, both Facebook and marketers will have to rise above the social media hype and develop mature, stable social business strategies.

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