Can Facebook Live up to Market Expectations?

Facebook's initial market capitalization appears to be high and is based on an assumption of high revenue growth projections for the next five years. Whilst Facebook appears to be in a very strong position to leverage its global reach as the world's largest social media site with close to a billion users, questions remain about its ability to monetize that user base. 

 

Facebook's Advertising Model Remains Immature but has huge Potential 

While Facebook is already mature in terms of number of social media users, and facing growing competition from Google in this area, it is still relatively immature in terms of its online advertising model, which is where the vast majority of its revenues currently come from. 

Facebook is currently finding it difficult to compete with Google's more mature and more developed advertising platform. To gain full industry confidence it will be critical that it spends a lot of time and resources developing its advertising model further. Last week for example, General Motors withdrew its $10 million advertising budget from Facebook. 

On the flip-side, Facebook's immature online advertising model, combined with its massive global reach, gives it huge potential for very high revenue growth over the longer term and compete head on with Google in terms of advertising revenues.  Google on the other hand, while still displaying solid growth in online advertising revenues, no longer has the potential for such rapid growth due to its more mature advertising platform. While Facebook's user base is well represented across most geographic segments globally, from a revenue perspective Facebook is still heavily skewed more towards North America. There is a huge opportunity to grow revenues in emerging markets such as Asia where Facebook is yet to adequately monetize the user base, and current Average Revenue per User (ARPUs) is much lower. 

 

Other Business Models will become Increasingly Important 

Facebook has also only just begun to explore new business models and opportunities in areas such as online shopping, similar to the way that Google is now diversifying its business model from its origins as a search company only. We can expect to a lot more action from Facebook in this area during the next few years. 

Facebook Credits, a virtual currency for games and linked to gaming apps that runs on Facebook such as Zynga, is a rapidly growing revenue stream for Facebook and is becoming increasingly important to its overall revenue model. Facebook needs to evolve these platforms and continue to make them relevant to the user. At present such revenues constitute a relatively small component of its overall revenue base. As growth from the advertising business slows down, they will play an increasingly more important role in Facebook's future success. 

Facebook has been so far successful in making its online platform highly interactive through applications that enable the sharing of media such as photos, content, and videos. Facebook's recent Instagram acquisition is one example of how it is transforming its platform into a one-stop shop for social media communication and collaboration. In coming years it is critical that Facebook continues with this strategy and develops a richer communications platform where users can not only use Instant Messaging and make phone calls, but have access to functionality such as videoconferencing sessions. Current market indications are that Facebook is fairly well placed to succeed with this strategy over the longer term. 

The Mobile platform remains one of the weakest links in Facebook's advertising strategy. Besides having a mobile interface for both Apple and Android, Facebook is yet to fully tap into and monetise this channel. Whether Facebook starts to develop its own mobile operating system to compete head on with Android and Apple, will be key in the battleground of the global media giants over the coming years. Other possible moves for Facebook include the development its own branded tablet, however for such a move to succeed it would be critical for Facebook to entice the application developer community to migrate to their platform. As their strategy matures, there is no doubt that an increased emphasis on this rapidly growing channel will be a key part of Facebook's growth journey. 

Another critical question is how Facebook will partner with the telco's and mobile carriers. In order for Facebook to diversify its business model, these types of relationships will play an increasingly key role over the next five to ten years. 

 

Privacy Issues Could Potentially be a Stumbling Block 

Whilst the opportunity for Facebook is immense, one area where it will need to exercise caution is in the area of privacy. Regulation by country around privacy could even potentially limit its growth and ultimately its revenues. In recent years many Facebook users have complained about privacy settings and in some cases users have withdrawn their membership entirely. This could potentially lead to more serious consequences for Facebook especially amongst countries with governments that have stricter laws on consumer issues such as China, which has in fact has completely banned Facebook. 

 

Conclusion 

It is critical that Facebook gets its strategy right at this juncture, not just with regards to the online advertising model, but in other areas of the business such as online gaming apps, content and application sharing, and mobile platforms (both for smartphones and tablet PC's). It is also important that Facebook addresses the issue of privacy if it is to achieve the high expectations set by the market. However with such strong potential for natural growth of the business model over the next five years, and with nearly one billion users to tap into, the long term outlook for Facebook appears to be very solid.