Original URL: http://www.theregister.co.uk/2012/02/02/facebook_ipo_analysis/

Facebook IPO: Boom or bubble?

We look at the numbers - and what's missing...

By Andrew Orlowski

Posted in Financial News, 2nd February 2012 13:11 GMT

Analysis Is Facebook hugely overvalued or a solid business with some reliable growth ahead of it? A great deal of both.

The reason the Facebook flotation is different from yourfunny.co.ck, or anything conceived by a Shoreditch "leisure startup", is that it already has a large and devoted audience. When you can reliably draw a large crowd every day, you should be able to make some money. This is the one constant between the medieval minstrel and the modern media company - it's the same business proposition.

And this is what makes Facebook special and, incidentally, quite different to Google. The Chocolate Factory was an integral part of web life and internet commerce when it floated in 2004, but despite being a global brand, it was a website that people only ever left for other destinations. (Google only realised the importance of this quite belatedly.)

By contrast, Facebook is very sticky, at least for a lot of people. Facebook's S-1 registration statement says it has 845m active users and 483m active daily users. A more important statistic offered is that in December 360m checked in six days out of seven.

Now, I'd be wary of inferring too much from any communication statistic offered for a time period that includes Christmas. It tends to inflate "connection metrics"; many people communicate just once a year and it'll be in December. If every month was like December, it would be Hallmark Cards who'd have the Facebook-sized evaluation this morning. But that's still a pretty decent number.

He also had a cunning plan.
Does Mark Zuckerberg?

So think of Facebook as a new TV channel, with some Facebook users already spending far more time on the site than they do watching TV. But how much time - and what kind of TV channel is Facebook?

As one analyst has noted, the S-1 lacks even the most basic information on how the usage figures were worked out. And where it appears, it's obfuscated. "On average, users in the aggregate spent more than 9.7 billion minutes per day on Facebook on personal computers during December 2011," is all we're told. So we must to do the maths for ourselves.

This is odd.

If you ask us nicely here at El Reg, our commercial department will send you a lovely pack telling you how many people read us, what sort of people are they and how they read us - you can even read the "sticky" story we've put up for advertisers. But it's actually standard practice: every publication must disclose this kind of information if it wants to be taken seriously by advertisers. TV companies obsess about seconds of attention. Facebook's evasiveness is striking - for whatever reason, it doesn't want us to know.

Now many independent monitors work hard figuring out how web visitors spend their surfing time, and although their estimates differ to Facebook's (Nielsen has always estimated a significantly lower number for time-on-site than Facebook itself) nobody is disputing that Facebook consumes far more minutes than anyone else, and is on an impressive upward trajectory. It would have been nice to hear it from the mouth of Zuck.

So where does Facebook see its growth? Let's find out.

Waiting for an explosion of online advertising and manure

Facebook's commercial proposition largely depends on growth in online advertising, and using its knowledge of the habits and behaviour of users to exploit into this. More offline advertising money will be spent online, says Facebook, and this will grow. The S-1 says worldwide online advertising market "is projected to increase from $68 billion to $120 billion, representing 12 per cent and 16 per cent, respectively, of the worldwide advertising market".

Facebook naturally makes much of the fact that users have (on the whole) real names. Whether this translates into "real behaviour" is something nobody in advertising really wants to talk about. Likes are cheap, but transactions are expensive.

The other is from - and please ensure that you're sitting down before reading this - in-app purchases made in virtual currencies. Games operator Zynga, famous for Farmville, contributed 12 per cent of Facebook's revenues last year.

As Peggy Lee sang, "Is that all there is?" There's a paradox here, one between the attention people give Facebook and its commercial ability to exploit it.

Facebook's lack of ambition

As Alan Patrick, of multimedia consultancy Broadsight, points out in two very interesting posts, Facebook is starting from a low base. Facebook's average revenue per user (ARPU) today, he estimates, is between $2 and $5 - let's be generous and say five. Google's ARPU at IPO was around $20 and it hit $20. Facebook has set itself some ambitious targets, however: "A lot more things have to go right, for a long time, for Facebook," notes Patrick, for it to achieve these.

Facebook may be able to get there with web advertising, developing such wonderful gifts to humanity such as (ahem) "sponsored stories", and micro-payments for virtual manure. But the S-1 shows a lack of ambition that would disappoint even a medieval minstrel.

Even Blackadder devised a cunning plan of selling fake religious artefacts (and indulgences and pardons) - although the Greenies have cornered the market in the latter in recent years.

This is all very odd. The internet has proved itself to be a disruptive technology - drawing millions of people into a new channel for media for hours every day. We know people pay for media they value. Facebook is already in the business of distributing media. Distributors of media who command regular footfall get to dictate terms - look at what the supermarkets have done unto the music business. And for media, substitute all kinds of other transactional services.

So Facebook is a potentially a really significant platform. But Facebook doesn't want to talk about any of this - let alone exploit it. And it shows an astonishing lack of ambition.

Instead the S-1 is full of some real blather: "We also have posted the phrase 'this journey is 1 per cent finished' across many of our office walls to remind employees that we believe that we have only begun fulfilling our mission to make the world more open and connected."

It's almost as if Facebook has discovered lumps of coal for the first time, discovered that this new thing is highly combustible in a predictable way - and decided to set up in the snowman-dressing business. They're perfect for the eyes. ®

Bootnote

You can find the Facebook S-1 filing right here. As an interesting comparison, shopping channel QVC, which employees 2,000 people in Kirkby alone (Facebook 3,200 worldwide), turned over $2.2bn in 2010. It sells stuff.