Sceptics sure need for profit will burst Facebook's bubble

By Paul Harris

Management consultant and business expert Peter Cohan does not plan on investing in Facebook stock any time soon.

The author of 10 business books, including Capital Rising and Export Now, took a look at the social media network's filings for its coming share sale, which could value it as high as US$100 billion ($120 billion), and knew he would take a pass. "Everything is so hyped. They are tapping a bubble," he said.

That sort of scepticism has not been the dominant tone of what must rank as one of the most remarkable weeks in the history of the internet. It saw Facebook complete its journey from its birth in a Harvard dorm room to going public, in a move that will create hundreds of new millionaires among its employees and turn its chief executive, Mark Zuckerberg, into one of the richest and most powerful people in the world - on paper, at least.

Documents filed with the US Securities and Exchange Commission claimed that it had a staggering 845 million active monthly users, half of whom sign in every day, US$3.7 billion ($4.4 billion) in annual revenue and a rocketing growth rate. It also has a very healthy profit margin of 27 per cent.

Yet amid all the merited praise of Facebook's astonishing rise, it is possible to find sceptics about the future.

Facebook is entering a very different world from the one in which it grew up in as a brash Silicon Valley startup. It will face different pressures now it has come of age. Even among those who reacted positively to Facebook's move last week it was possible to detect a change of mood.

"It is a very valuable company. But there will be bumps on the road ahead," said David Sherman, professor of accounting at Northeastern University in Boston.

Facebook is unusual in that its biggest asset is not really something it makes. It is not a product in the traditional sense of the word and there is not a single service that it provides. Instead, Facebook's true value lies with its vast user base and the myriad, ever-shifting ways in which its members use the website.

That mother lode of personal profiles is what advertisers prize above all. The information that Facebook harvests and stores on its users is a goldmine for marketers and any company serious about selling its products.

But one problem Facebook faces is how to expand that already enormous user base. What started out as a networking site for Harvard students now encompasses almost one in eight people on the planet. Thus the sort of exponential growth that has marked Facebook's astonishing rise is simply not going to be possible for much longer.

Coupled with that are problems in areas of the world where Facebook has yet to make its mark, notably parts of Asia where local social media websites have a strong market share, and most particularly China.

There are more than half a billion Chinese online, but China's Government is less keen on being infiltrated by a Western social media giant and Facebook may not be able to negotiate a way in.

But Facebook has to find growth somewhere. Now that it plans to go public it will gain shareholders who will demand ever-rising profits each three months.

In SEC papers Zuckerberg wrote: "Simply put, we don't build services to make money; we make money to build better services ... and I think more people want to use services from companies that believe in something beyond simply maximising profits."

Zuckerberg's sentiment will be news to most Wall Street investors, as Facebook is likely to discover soon after its first shares hit the open market. If profits or sales disappoint, then Facebook's shares will plummet just like those of any other company.

- Observer

© Copyright 2014, APN New Zealand Limited

Assembled by: (static) on red akl_a4 at 02 Oct 2014 16:31:13 Processing Time: 334ms