Facebook is heavily (heavily!) reliant on display advertising, all of which is a) challenged by the switch of its userbase to mobile, and b) going to hit critical mass eventually. No matter how smart you make display advertising, there's still a cap on how much you can foist onto users before you piss them off.
IMO, Facebook's future depends on two things:
1) Figuring out how to serve up contextually relevant ads on mobile platforms in a nonintrusive and, ideally, useful way.
2) Figuring out how to serve up contextually relevant ads outside of Facebook, to Facebook Connect-backended partner sites and apps. (Sort of like an AdSense/AdWords hybrid, but based on very intelligent user-interest and browsing data).
I'm betting on #2's being the runaway breadwinner for Facebook in the long run. The longterm strategy seems to be to reduce reliance/dependence on Facebook.com in favor of Facebook Connect.
I've been saying this for a while now (http://news.ycombinator.com/item?id=3041689). Facebook's engagement is shifting to mobile. Their entire business model relies on web. Their app ecosystem has been crashing as a result, and display advertising is likely to follow.
Facebook is filled with smart people. They understand the trends better than we do. As you'll note, 4 of their top 5 Risk Factors relate to the web-to-mobile shift and the problems inherent with that.
From the filing:
#2 - "We generate a substantial majority of our revenue from advertising. The loss of advertisers, or reduction in spending by advertisers with Facebook, could seriously harm our business;"
#3 - "Growth in use of Facebook through our mobile products, where we do not currently display ads, as a substitute for use on personal computers may negatively affect our revenue and financial results;"
#4 - "Facebook user growth and engagement on mobile devices depend upon effective operation with mobile operating systems, networks, and standards that we do not control;"
#5 - "We may not be successful in our efforts to grow and further monetize the Facebook Platform;"
Hmmm. I think the obvious transition would be to ship the Facebook Phone and heavily incorporate Facebook Credits.
The four things people do on phones (call, email, text, and nowadays photo-share) are all inherently social things. Crucially, your iPhone contacts list likely has only the first/last name and phone number for each person, whereas the Facebook app is far richer in its implementation of the very same contacts list -- because the person on the other side has gone to the trouble of keeping their address, phone, picture, and the like all fresh and up to date[1].
So the FB Phone would be an enormous improvement in contacts management over what we currently have, and an FB Phone Directory would probably not be long in following[2].
Once people are using the FB Phone, you'd want to heavily push FB Credits as the payment solution for everything. I am sure that from a fraud protection standpoint, the identity signals that an FB account provides are highly desirable to Visa and Mastercard. FB could also just cut out the middleman and do payments directly with an FB Card, instantly accepted by 800+ million people worldwide and countless businesses. Sign up for FB.com and accept/receive payments. Use the social graph for authentication, where each node has an authenticity rank (based on its date of first signup, number of non-commercial posts, number of authentic friends, and the like). It's easy to set up a fake email address, but much harder to fake a realistic profile for years and get "real people" to friend you and interact with you.
Thus, a Facebook purchase or clone of something like WePay or Square would seem like a logical move. Embrace the shift towards mobile and own mobile payments by owning identity. Owning identity means a lower risk profile and higher profit margin than any competitor in payments.
[1] Not incidentally, the use of the FB Phone would ensure that people have even more of an incentive to keep their contact information up to date and searchable.
[2] This directory would be a huge product in its own right and the core of a real social search product, something more along the lines of findpeopleonplus.com than anything that's called itself "social search" to this point. The purpose of social search is to find a person, not a web page.
Facebook will never grow revenue to 10x (matching Google) by continuing to sell display advertising on its own site.
However, it knows so much about users and keeps them logged in, so it definitely has potential to serve highly targeted or viral campaigns everywhere else on the web and mobile apps, a much better version of adsense.
Secondly, it is involving itself deeply in to user's habits and eventually may make a big play in to e-commerce, getting a cut out of every transaction made by the user (while frictionlessly sharing the information, of course). Credits is just in its infancy.
Finally, its learning so much about user's habits on the web that it can do a better job than Google at search, and make a killing on search ads.
Facebook already solved mobile with News Feed ads.
Today, the most effective FB ads are the ones that show up in the News Feed after your friends "Like" or take action on an ad or brand page. The ROI on these ads crushes that of traditional display ads (including those on the FB right-side margin) AND the targeting is still in its nascency.
The best part is that these ads transfer seamlessly to mobile or any future platform.
Isn't HATEOAS (REST) a great case for #1? If all the APIs get their state from Facebook they could inject a 2-3 seconds ad between every XX requests or YY interval. I dislike ads just like the next guy, but this IMO is better than intrusive hooks inside the content, much like TV.
mobile use can be leveraged out by call-to-action approach including deals. ROI for call-to-action s much greater then for display ads and also revenue from deals can be more significant then it is today
They are doing a dual class offering. The class B shares (i.e. those held by Zuckerberg and other insiders) are going to have ten times the voting rights as the class A shares.
I wouldn't by into such an ownership structure, though to be fair, google has such a structure and those that bought that at IPO have done very well so far.
From the risks section:
As a result of voting agreements with certain stockholders, together with the shares he holds, Mark Zuckerberg, our founder, Chairman, and CEO, will be able to exercise voting rights with respect to an aggregate of XX shares of common stock, representing a majority of the voting power of our outstanding capital stock following our initial public offering. As a result, Mr. Zuckerberg has the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of our assets. In addition, Mr. Zuckerberg has the ability to control the management and affairs of our company as a result of his position as our CEO and his ability to control the election of our directors. Additionally, in the event that Mr. Zuckerberg controls our company at the time of his death, control may be transferred to a person or entity that he designates as his successor. As a board member and officer, Mr. Zuckerberg owes a fiduciary duty to our stockholders and must act in good faith in a manner he reasonably believes to be in the best interests of our stockholders. As a stockholder, even a controlling stockholder, Mr. Zuckerberg is entitled to vote his shares, and shares over which he has voting control as a result of voting agreements, in his own interests, which may not always be in the interests of our stockholders generally.
One of the interesting gems in this filing is at the very end, it details stock grants for acquisitions so you can infer the running rate of talent acquisitions. So for example, "On February 28, 2011, we issued 681,357 shares of our Class A common stock as consideration to a company in connection with our purchase of certain assets from the company." You can cross reference these with news and correlate approximate acquisition cost based on the estimate value of price per share assuming, say, a valuation of $100 billion. So I'm guessing that the company I mentioned is Octazen and assuming a $100 billion valuation (~$50 per share), this comes out to about $35 million (assuming an entirely stock acquisition - note that Facebook spent, for example, $20 million aggregate in cash on acquisitions in 2010).
A small tidbit. FB paid Zuck $783,529 (3) in "other" compensation from his base 500k salary.
(3) The fine print.... The amount reported represent approximately $692,679 for costs related to personal use of aircraft chartered in connection with his comprehensive security program and on which family and friends flew during 2011.
It turns out that Zynga only accounts for 12% of their revenue.
"In 2011, Zynga accounted for approximately 12% of our revenue, which amount was comprised of revenue derived from payments processing fees related to Zynga’s sales of virtual goods and from direct advertising purchased by Zynga. Additionally, Zynga’s apps generate a significant number of pages on which we display ads from other advertisers."
It appears they would still be profitable without Zynga.
"It appears they would still be profitable without Zynga."
That assumes many of those Zynga users would still be on, or use Facebook as often, if it wasn't for Zynga or other games on the platform. The significant amounts of time spent on Facebook is due in large part to games and photos. That length of time on the platform helps to drive display ad revenue.
<Interesting/> "Mobile" appears as risk factor in 2 instances.
- Growth in use of Facebook through our mobile products, where we do not currently display ads, as a substitute for use on personal computers may negatively affect our revenue and financial results;
- Facebook user growth and engagement on mobile devices depend upon effective operation with mobile operating systems, networks, and standards that we do not control;
They will be able to exert any control they want on the Windows Phone through Microsoft. Also, what prevents them from showing ads in mobile apps? They did a great work locking everyone out of functionality that would enable direct FB access, app developers can only access FB as an FB app, so no ad-less competition there.
I'm curious as to what facebook did to generate $382k of revenue in 2004. Seems like a great start for a company of their size at the time. IIRC, they didn't turn on ads for a while afterwards.
It looks like the accountant put in the perfect round figure of 1000 million for 2011 Net Income& then backed out all the other entries :) I used to do exactly that in my Accountancy 101 exams - Q.write the income statement for Acme Corp. What do you want Net Income to be ? XXX $. That means, TCO must be XXX - yyy, R&D must be XXX - zzz, and similarly back out everything else. Not saying they actually did that, just that seeing such perfectly round numbers reminded me of those exam problems.
Key information on revenue is on page 50. 85% of revenue comes from ads, which grew 69% Y/Y mostly driven by user growth (39% Y/Y) and showing a bunch more ads starting Q4 2010:
2011 Compared to 2010.
Revenue in 2011 increased $1,737 million, or 88% compared to 2010. The increase was due primarily to a 69% increase in advertising revenue to $3,154 million. Advertising revenue grew due to a 42% increase in thenumber of ads delivered and an 18% increase in the average price per ad delivered. The increase in ads delivered was driven primarily by user growth. The number of ads delivered was also affected by many other factors including product changes that significantly increased the number of ads on many Facebook pages beginning in the fourth quarter of 2010, partially offset byan increase in usage of our mobile products, where we do not show ads, and by various product changes implemented in 2011that in aggregate modestly reduced the number of ads on certain pages. The increase in average price per ad delivered was affected by factors including improvements in our ability to deliver more relevant ads to users and product changes that contributed to higher user interaction with the ads by increasing their relative prominence.
Facebook's revenue will eventually shift from display advertising to data selling. There will come a time when no display campaign will run without input from Facebook.
Before any impression on any online media, advertisers will make a query to Facebook to find out which of the ads should be shown to this user. And Facebook will charge a small fee for each such query.
Interestingly, Google 2011 revenues are $37b, profits $9.7b, ratio almost exactly the same. Google also has 10x the number of employees as FB. Of course FB growth is much faster.
Consider that in 1996, there were far fewer people on the internet/web. It doesn't really make sense to compare absolute revenue numbers. Growth rates and revenue per user would probably be more interesting.
Interesting salary history: 100% raise over 2 years.
Molly Graham, the daughter of Donald E. Graham, a member of our board of directors, is employed by us. During 2009, 2010, and 2011, Ms. Graham had total cash compensation, including base salary, bonus and other compensation, of $98,058, $133,620, and $189,168.
If you are logged on Facebook, never go on the website but still see the like-button that are scattered all around the web, do you count as an "monthly active user" ?
$1 Billion in profit => $1/(user year) in profit for 2011, correct?
That's pretty darn good money, but not a huge amount more room for user-growth. They'll grow by having new businesses/making current ones more profitable. New business would have to be monetizable (eventually, at least), current businesses would either have to convert better or become less costly to run.
Facebook is full of some smart cookies - it'll be interesting to see how they accomplish those paths.
I was thinking the same thing. Considering they have ~42% of all users (assuming the billion internet user estimate) there is only so much growth available from relying on their current model of acquiring users and serving ads to them.
I would imagine a next logical step would be to expand its ad network beyond facebook (i.e. serve facebook ads outside of facebook itself), it would allow for a significant jump in growth potential while staying close to their core competency.
As someone that lives in EU (as in, not in USA) and has no clue about stock market: what would be the easiest way for me to get a couple of hundred € worth of stocks in FB? Is that even possible?
You need to buy them on the day they IPO. You will not be able to buy it at the IPO price but at the price of the first minute of trading.
On top of that, "a couple of hundred €" is probably not enough money. The fees to buy stocks on the Nasdaq is usually in the tens of euro. You'll probably have between 10 and 50 euros of fees at the cheaper online trading platforms.
You can also call your traditional bank to buy the stocks but the fees would probably be higher.
You're not going to get in on the IPO price. That's for the banks who are selling to their very top-tier clients before it even starts trading on the exchange, basically.
Look into what is involved in buying stock in any American company from the EU. If you're still interested, you can pick up a few shares after it's trading on the exchanges.
Probably not, no. Most IPO shares are sold to large clients of brokerages. One of the inducements that large investment banks offer independent brokerages who use their services is letting them offer hot IPO stocks to some of their major customers.
Probably best to find a local broker that is on nasdaq. In the Netherlands, I would advise Binck or something similar. I personally have my companies stock in eTrade, but that is because that is how I received it :)
It can be tricky to get into the IPO though. Don't know the details on those rules.
I also don't really have a clue, but I think if you have a "trading depot" with some bank, they will offer you several stock exchanges to trade on. So you could pick some US stock exchange and buy the shares there.
[+] [-] jonnathanson|14 years ago|reply
IMO, Facebook's future depends on two things:
1) Figuring out how to serve up contextually relevant ads on mobile platforms in a nonintrusive and, ideally, useful way.
2) Figuring out how to serve up contextually relevant ads outside of Facebook, to Facebook Connect-backended partner sites and apps. (Sort of like an AdSense/AdWords hybrid, but based on very intelligent user-interest and browsing data).
I'm betting on #2's being the runaway breadwinner for Facebook in the long run. The longterm strategy seems to be to reduce reliance/dependence on Facebook.com in favor of Facebook Connect.
[+] [-] teej|14 years ago|reply
Facebook is filled with smart people. They understand the trends better than we do. As you'll note, 4 of their top 5 Risk Factors relate to the web-to-mobile shift and the problems inherent with that.
From the filing:
#2 - "We generate a substantial majority of our revenue from advertising. The loss of advertisers, or reduction in spending by advertisers with Facebook, could seriously harm our business;"
#3 - "Growth in use of Facebook through our mobile products, where we do not currently display ads, as a substitute for use on personal computers may negatively affect our revenue and financial results;"
#4 - "Facebook user growth and engagement on mobile devices depend upon effective operation with mobile operating systems, networks, and standards that we do not control;"
#5 - "We may not be successful in our efforts to grow and further monetize the Facebook Platform;"
[+] [-] ramanujan|14 years ago|reply
The four things people do on phones (call, email, text, and nowadays photo-share) are all inherently social things. Crucially, your iPhone contacts list likely has only the first/last name and phone number for each person, whereas the Facebook app is far richer in its implementation of the very same contacts list -- because the person on the other side has gone to the trouble of keeping their address, phone, picture, and the like all fresh and up to date[1].
So the FB Phone would be an enormous improvement in contacts management over what we currently have, and an FB Phone Directory would probably not be long in following[2].
Once people are using the FB Phone, you'd want to heavily push FB Credits as the payment solution for everything. I am sure that from a fraud protection standpoint, the identity signals that an FB account provides are highly desirable to Visa and Mastercard. FB could also just cut out the middleman and do payments directly with an FB Card, instantly accepted by 800+ million people worldwide and countless businesses. Sign up for FB.com and accept/receive payments. Use the social graph for authentication, where each node has an authenticity rank (based on its date of first signup, number of non-commercial posts, number of authentic friends, and the like). It's easy to set up a fake email address, but much harder to fake a realistic profile for years and get "real people" to friend you and interact with you.
Thus, a Facebook purchase or clone of something like WePay or Square would seem like a logical move. Embrace the shift towards mobile and own mobile payments by owning identity. Owning identity means a lower risk profile and higher profit margin than any competitor in payments.
[1] Not incidentally, the use of the FB Phone would ensure that people have even more of an incentive to keep their contact information up to date and searchable.
[2] This directory would be a huge product in its own right and the core of a real social search product, something more along the lines of findpeopleonplus.com than anything that's called itself "social search" to this point. The purpose of social search is to find a person, not a web page.
[+] [-] pessimist|14 years ago|reply
However, it knows so much about users and keeps them logged in, so it definitely has potential to serve highly targeted or viral campaigns everywhere else on the web and mobile apps, a much better version of adsense.
Secondly, it is involving itself deeply in to user's habits and eventually may make a big play in to e-commerce, getting a cut out of every transaction made by the user (while frictionlessly sharing the information, of course). Credits is just in its infancy.
Finally, its learning so much about user's habits on the web that it can do a better job than Google at search, and make a killing on search ads.
If all this happens, $100B is a bargain.
[+] [-] vm|14 years ago|reply
Today, the most effective FB ads are the ones that show up in the News Feed after your friends "Like" or take action on an ad or brand page. The ROI on these ads crushes that of traditional display ads (including those on the FB right-side margin) AND the targeting is still in its nascency.
The best part is that these ads transfer seamlessly to mobile or any future platform.
[+] [-] emp_|14 years ago|reply
[+] [-] ngsayjoe|14 years ago|reply
1) They have users logged in all the time ... they can serve targeted ads (e.g. gender based ads) 2) AdSense is monopolizing the market now
[+] [-] bojanbabic|14 years ago|reply
[+] [-] cafebabe|14 years ago|reply
[deleted]
[+] [-] ig1|14 years ago|reply
[+] [-] bradleyjg|14 years ago|reply
I wouldn't by into such an ownership structure, though to be fair, google has such a structure and those that bought that at IPO have done very well so far.
From the risks section:
As a result of voting agreements with certain stockholders, together with the shares he holds, Mark Zuckerberg, our founder, Chairman, and CEO, will be able to exercise voting rights with respect to an aggregate of XX shares of common stock, representing a majority of the voting power of our outstanding capital stock following our initial public offering. As a result, Mr. Zuckerberg has the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of our assets. In addition, Mr. Zuckerberg has the ability to control the management and affairs of our company as a result of his position as our CEO and his ability to control the election of our directors. Additionally, in the event that Mr. Zuckerberg controls our company at the time of his death, control may be transferred to a person or entity that he designates as his successor. As a board member and officer, Mr. Zuckerberg owes a fiduciary duty to our stockholders and must act in good faith in a manner he reasonably believes to be in the best interests of our stockholders. As a stockholder, even a controlling stockholder, Mr. Zuckerberg is entitled to vote his shares, and shares over which he has voting control as a result of voting agreements, in his own interests, which may not always be in the interests of our stockholders generally.
[+] [-] newhouseb|14 years ago|reply
[+] [-] lyime|14 years ago|reply
(3) The fine print.... The amount reported represent approximately $692,679 for costs related to personal use of aircraft chartered in connection with his comprehensive security program and on which family and friends flew during 2011.
Like a boss.
[+] [-] sriramk|14 years ago|reply
[+] [-] apike|14 years ago|reply
"In 2011, Zynga accounted for approximately 12% of our revenue, which amount was comprised of revenue derived from payments processing fees related to Zynga’s sales of virtual goods and from direct advertising purchased by Zynga. Additionally, Zynga’s apps generate a significant number of pages on which we display ads from other advertisers."
It appears they would still be profitable without Zynga.
[+] [-] veyron|14 years ago|reply
Are those ads counted toward the 12% statistic?
[+] [-] vnorby|14 years ago|reply
[+] [-] nekojima|14 years ago|reply
That assumes many of those Zynga users would still be on, or use Facebook as often, if it wasn't for Zynga or other games on the platform. The significant amounts of time spent on Facebook is due in large part to games and photos. That length of time on the platform helps to drive display ad revenue.
[+] [-] chintan|14 years ago|reply
- Growth in use of Facebook through our mobile products, where we do not currently display ads, as a substitute for use on personal computers may negatively affect our revenue and financial results;
- Facebook user growth and engagement on mobile devices depend upon effective operation with mobile operating systems, networks, and standards that we do not control;
[+] [-] ypcx|14 years ago|reply
[+] [-] omarish|14 years ago|reply
Link: http://www.sec.gov/Archives/edgar/data/1326801/0001193125120...
[+] [-] dxbydt|14 years ago|reply
[+] [-] mwytock|14 years ago|reply
2011 Compared to 2010. Revenue in 2011 increased $1,737 million, or 88% compared to 2010. The increase was due primarily to a 69% increase in advertising revenue to $3,154 million. Advertising revenue grew due to a 42% increase in thenumber of ads delivered and an 18% increase in the average price per ad delivered. The increase in ads delivered was driven primarily by user growth. The number of ads delivered was also affected by many other factors including product changes that significantly increased the number of ads on many Facebook pages beginning in the fourth quarter of 2010, partially offset byan increase in usage of our mobile products, where we do not show ads, and by various product changes implemented in 2011that in aggregate modestly reduced the number of ads on certain pages. The increase in average price per ad delivered was affected by factors including improvements in our ability to deliver more relevant ads to users and product changes that contributed to higher user interaction with the ads by increasing their relative prominence.
[+] [-] revorad|14 years ago|reply
I'm really proud of him for clearly and loudly representing the hacker way when the whole world is watching.
[+] [-] olivercameron|14 years ago|reply
1. http://techcrunch.com/2012/02/01/facebooks-s-1-and-the-large...
[+] [-] ajays|14 years ago|reply
Before any impression on any online media, advertisers will make a query to Facebook to find out which of the ads should be shown to this user. And Facebook will charge a small fee for each such query.
[+] [-] dm8|14 years ago|reply
[+] [-] mun2mun|14 years ago|reply
[+] [-] cwe|14 years ago|reply
src: https://twitter.com/#!/goldman/status/164830894685818880
[+] [-] pessimist|14 years ago|reply
[+] [-] cromwellian|14 years ago|reply
[+] [-] gphil|14 years ago|reply
http://sec.gov/Archives/edgar/data/1288776/00011931250407363...
[+] [-] RobPfeifer|14 years ago|reply
I saved this when I came across it a while back. Also, they had $961mm in net income the year they went out
[+] [-] alain94040|14 years ago|reply
Molly Graham, the daughter of Donald E. Graham, a member of our board of directors, is employed by us. During 2009, 2010, and 2011, Ms. Graham had total cash compensation, including base salary, bonus and other compensation, of $98,058, $133,620, and $189,168.
[+] [-] bibinou|14 years ago|reply
[+] [-] meric|14 years ago|reply
[+] [-] patd|14 years ago|reply
[+] [-] moxiemk1|14 years ago|reply
That's pretty darn good money, but not a huge amount more room for user-growth. They'll grow by having new businesses/making current ones more profitable. New business would have to be monetizable (eventually, at least), current businesses would either have to convert better or become less costly to run.
Facebook is full of some smart cookies - it'll be interesting to see how they accomplish those paths.
[+] [-] brd|14 years ago|reply
I would imagine a next logical step would be to expand its ad network beyond facebook (i.e. serve facebook ads outside of facebook itself), it would allow for a significant jump in growth potential while staying close to their core competency.
[+] [-] CWIZO|14 years ago|reply
[+] [-] patd|14 years ago|reply
On top of that, "a couple of hundred €" is probably not enough money. The fees to buy stocks on the Nasdaq is usually in the tens of euro. You'll probably have between 10 and 50 euros of fees at the cheaper online trading platforms.
You can also call your traditional bank to buy the stocks but the fees would probably be higher.
[+] [-] spinchange|14 years ago|reply
Look into what is involved in buying stock in any American company from the EU. If you're still interested, you can pick up a few shares after it's trading on the exchanges.
[+] [-] Mvandenbergh|14 years ago|reply
[+] [-] hkolk|14 years ago|reply
It can be tricky to get into the IPO though. Don't know the details on those rules.
[+] [-] Tichy|14 years ago|reply
[+] [-] blantonl|14 years ago|reply
A valuation of $80-$100 billion dollars after the IPO would mean Facebook would be trading at 80 to 100x earnings.
Facebook is going to need to see some serious growth to continue to command a PE ratio like that long term. Serious Growth
[+] [-] ldayley|14 years ago|reply
[+] [-] jacques_chester|14 years ago|reply
[+] [-] gggrgraham|14 years ago|reply
http://theairspace.net/commentary/letter-mark/
The Hacker Way has grown up and lambasted Wall St.
[+] [-] zach|14 years ago|reply
http://www.sec.gov/Archives/edgar/data/1326801/0001193125120...