I have been looking at Facebook's IPO filing, and I have noticed that its risk factors can be grouped into areas of potential concern for investors. Yesterday, I talked about risk factors and growth. In this post, I focus on dependence.
From the 35 initial risks from the filing, I have listed some of the sections that have similar themes:
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.
7. Action by governments to restrict access to Facebook in their countries could substantially harm our business and financial results.
15. In 2011 and the first quarter of 2012, we estimate that up to 19 per cent and 15 per cent of our revenue, respectively, was derived from Payments processing fees from Zynga, direct advertising from Zynga, and revenue from third parties for ads shown on pages generated by Zynga apps. If Zynga does not maintain its level of engagement with our users or if we are unable to successfully maintain our relationship with Zynga, our financial results could be harmed.
22. Our CEO has control over key decision making as a result of his control of a majority of our voting stock.
26. Our business is dependent on our ability to maintain and scale our technical infrastructure, and any significant disruption in our service could damage our reputation, result in a potential loss of users and engagement, and adversely affect our financial results.
31. The loss of one or more of our key personnel, or our failure to attract and retain other highly qualified personnel in the future, could harm our business.
Facebook is dependent on advertising for its revenue. Mark Zuckerberg has always said that Facebook would always be free. But with advertising bringing in 85 per cent of its annual revenue in 2011 Facebook is even more reliant on advertising than CBS according to Peter Lauria of Thomson Reuters.
Facebook is dependent on governments keeping access open for users. During the Arab Spring in 2011, Libya blocked access to Facebook and other sites to prevent activists calling for political reforms in the country.
Facebook was also blocked in both Tunisia and Egypt where it was credited for helping organise regime-ending protests in both countries. In Egypt access to the whole Internet was shut down for a time.
Facebook is dependent on Zynga. Zynga's continued success adds to the success of Facebook. Facebook charges Zynga 30 per cent to redeem each Facebook Credit purchased during gaming.
With Zynga accounting for approximately 12 per cent of Facebook's revenue it is no surprise that Facebook is concerned about maintaining a good relationship with Zynga. Facebook filed an amendment to the SEC filing detailing the terms of its agreement with Zynga, exclusivity to Facebook and how much growth it expected.
Mark Zuckerberg will still control Facebook. He holds the majority of the existing stock. He currently holds 56.9 per cent of the stock before IPO. His total pay package was $1.49 million but after 1st January 2013 his salary will fall to one dollar per year.
Facebook used to pride itself on the fact that the infrastructure never went down and that Facebook would always be available to its users. However, Facebook recently changed its Data Access policy which states that it will no longer guarantee uptime. This amendment could be due to its European wide outage in March.
With over 3,200 employees, the value of human capital is high at Facebook. Losing key talent to another Silicon Valley business could mean the difference between success and failure.
Facebook rewards its top people well. Sheryl Sandberg, COO at Facebook earned a salary of $30.9 million in 2011 and the CFO, David Ebersman earned $18.65 million.
These concerns are no more or no less than the concerns that other large companies have. Google depends on advertising for its revenue as do many other companies. Companies value their key personnel at senior levels throughout the organisation -- whatever the organisation happens to be.
Organisations change, sometimes for the better, sometimes not. People are a valuable asset to a company -- but are no longer its greatest asset. Bill Gates stepped back from Microsoft; Apple no longer has Steve Jobs. If Mark Zuckerberg left Facebook, then Facebook would continue to operate.
It would be a different Facebook, but it would still continue to thrive.