Was Facebook IPO Drama Overplayed? No

Was Facebook IPO Drama Overplayed? No

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“Listen, Hatcher. You gotta tell them. Soylent Green is people!” That line uttered by the late Charleston Heston in the classic 1973 film, “Soylent Green” could easily be used to describe the social media juggernaut, Facebook (FB:NASDAQ).

With 901 million people as of March 31, 2012 “friending” and “liking” anywhere from an hour a month to hours per day, Facebook is the world’s most visited website.

All those 901 million eyeballs, and maybe more, are necessary if the company, which had its initial public offering on 21 May 2012, is to meet growth projections and investor expectations. Facebook generates advertising revenues, currently estimated at 85% of its total revenues, by selling to advertisers the opportunity to get in front of those eyeballs.

Doubts as to how well Facebook could sell its 900 million subscribers in the advertiser market helped drive the value of Facebook’s stock down from its initial opening price on 21 May 2012 of $38 to a low in June of $25.05. The biggest example of doubt came from General Motors. The automaker decided to yank its annual $10 million in advertising purchases from Facebook soon after the company went public. GM’s concerns were that they simply could not tell how big a bang for the buck they were receiving for their advertising investment.

One constant concern that could weigh heavily on advertising and impact Facebook’s ability to grow revenues in the future is privacy concerns. Facebook acknowledged as much to the public in its prospectus dated 18 May 2012, just days before its initial public offering.

Morningstar analyst Rick Summer in a research note on 15 June 2012 said, “Although the revenue opportunity for Facebook is large, the company faces several risks that could ultimately prove our investment thesis to be overly optimistic.

First, regulators may prevent the company from tracking its users. Significant regulatory action could detract from the value of its advertising platform. Second, excessive advertising or privacy fears could lead to a mass exodus of users. Other social networks (for example, MySpace, owned by News Corporation NWS) have experienced declines. Lastly, if agencies and advertisers experience a permanent lack of visibility into advertiser ROI, Facebook’s advertising opportunity may be significantly constrained.”

Regulatory agencies worldwide have been keeping their fingers on Facebook’s neck, arguably more for slowing down the company’s breathing rather than just a periodic check of its pulse. Back in November 2011, the Federal Trade Commission and Facebook settled an eight-count complaint alleging Facebook violated promises to consumers that it would keep certain subscriber information private. Facebook agreed to not to make misrepresentations about consumer security or privacy; get prior consent before overriding consumer privacy preferences; and to submit to an independent of its privacy practices every two years for the next 20 years.

In December 2011, Facebook entered an agreement with the Irish Data Protection Commission to amend its data protection practices and provide more information to its users.

Just recently, Facebook entered a $20 million settlement in California in response to a complaint that it publicized that a certain number of its users liked an advertisement, but didn’t pay the users or give them a way to opt out.

Facebook realizes, as expressed in its prospectus, that changes in user sentiment not only about the quality of its services, but about expectations of privacy could reduce the number of subscribers engaging on Facebook and ultimately impact advertisers’ attraction to the company.

But could Facebook’s recent turnaround erase the drama behind the initial loss in value? On Friday, Facebook closed at $33.05. According to All Things Digital’s Kara Swisher, part of the reason may be due to an agreement between Facebook and Zynga (ZNGA:NASDAQ) where Facebook ads will begin appearing on Zynga’s website. Facebook’s expansion of its advertising network beyond its own website may be seen as a positive for the company as it attempts to garner more advertising dollars.

Facebook’s Friday’s closing is still 13% below its share price when the stock was first publicly issued. Privacy issues may still work in the future to keep the company from meeting initial expectations. Its advertising networking partner Zynga has had and acknowledged its privacy issues, and Monday’s opening may tell us more about the impact of the California settlement as investors digest he news. Regulators will be keeping their eyes on Facebook as it finds its way out of the woods.

Soylent Red was always considered the inferior food product when compared to Soylent Green. Red means losses; green means cash. Facebook wants to stay in the black. Given Facebook’s soylent green is made out of people, the company will always have to walk that fine line between how much personal information to release and staying attractive to advertisers.

4 COMMENTS

  1. I was discussing Facebook just yesterday…nothing having to do with shares…rather just the fact that I truly enjoy knowing little bits about the good things that happen in my friends and family's lives. All that i learn through facebook–A cousin turning 30…only see her at weddings and funerals these days. An out of state nephew pitching baseball and Graduating. Prom. Pictures of happy times. Good news. Life gets busy. We call less

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