Will Facebook succeed after IPO, or will its reliance on ads for most of its revenue drive it too far down a one way street?
With its $5 billion IPO coming up, Facebook will become just another public company under pressure to succeed, quarter by quarter, year on year. Will it change the way you interact with your friends as the pressure to earn more revenue for its shareholders bites harder?
The pressure will manifest itself in different ways. Facebook will need to grow the business. But will it grow revenue through more ad sales? In 2011 Facebook earned $3.1 billion from ads, a 69 per cent increase on 2010 figures. But we don't spend as much time looking at ads as Facebook would like us to.
Ad revenue brings in over 83 per cent of the $3.71 billion total revenue reported. The potential for this revenue stream to fail is just too great. We are already smart about the ads we click on Facebook.
We prefer to see what our friends are sharing, what updates they post, what games they are playing. Our attention is not directed towards ads. But social gaming is a good alternative revenue generator for Facebook, both through ads and tax.
Zynga paid Facebook between $5 million and $8 million per month for banner ads on Facebook in 2010 and with new games added to Zynga, such as Draw Something, this revenue is set to grow year on year. Every month, Zynga also pays Facebook in the region of $30 million for its credits tax.
After IPO, Facebook must diversify its revenue streams. And the only way it can currently do this is through online games and e-commerce.
E-commerce leaderFacebook has the potential to become an e-commerce powerhouse to rival Amazon or eBay. It has a much larger user base after all. Amazon has over 164 million active accounts with revenue of $48.1 billion in 2011. eBay has a global customer base of 233 million with $11.6 billion in revenue. Facebook revenue seems small by comparison.
With Facebook user accounts tipped to pass 1 billion in summer 2012, there is some low hanging fruit. This is ready for the taking, by well crafted, successful e-commerce Facebook stores that encourage sharing, discussion and are not just a repetition of the existing online store.
Another revenue opportunity is through Facebook Credits, the online currency used to buy virtual goods in Facebook Games which have been mandatory since July 1st last year. Facebook Credits could easily be extended to be used for e-commerce purchases. In 2011, 15 million users used Facebook Credits to buy virtual goods online.
Facebook Credits could turn into Facebook's 'big bet'. The more users that sign up for Facebook Credits, the more appealing those credits appear to online retailers. If more retailers sign up for payments by Facebook Credits, the more secured revenue that Facebook achieves.
F- commerce - fail commerce?Unfortunately Facebook f-commerce stores are failing by selling not socialising. They are failing to understand what attracts us to Facebook, and why Facebook wants to keep us adding to its data store by encouraging our social activities.
The only IP Facebook has is its data. That is your data, the data you have freely shared. We are encouraged to share more and more about ourselves through the new Timeline feature, to see what our friends are doing via the Facebook ticker and read what our friends read through apps that use frictionless sharing. We freely give our data to increase the richness of the Facebook data store.
And what a rich data store Facebook owns. Google has nowhere near that amount of information about us, our likes, our relationships with family members and our hobbies for it to be able to deliver effective and targeted ads. Yet Google ads are very effective, appropriate, and right on the button when it comes to click throughs and revenue.
Facebook, even with its revenue from ads has some way to go to come close to Google's ad revenue numbers -- even though users spend much more time on Facebook than they do on Google.
Post IPO Facebook might have its work cut out. With failing f-commerce storefronts closing or not performing as expected, trying to ensure revenue growth to keep its army of new shareholders happy might force a change in direction for the company.
The challenge for Facebook is ensuring it is the right change...
- Facebook stores fail f-commerce goals by selling not socialising
- American Express and PayPal go head to head with Facebook payment apps
- Cillit Bang and Facebook clean up with All in 1 social commerce
- Maplin launches Social Store for geeks on Facebook
- The pros and cons of Facebook Credits for merchants
- 15 million used Facebook Credits to buy virtual goods in 2011
- Facebook is used 19x more than Twitter, 135x more than Google+