EARLIER THIS week Bebo, the once dominant social network with one million Irish users, went offline, with its founder Michael Birch tweeting its obituary.
The site, which Birch sold to Time Warner subsidiary AOL for $850 million in 2008, is now back online but it was a salutary tale for Facebook, even after it filed documents late on Wednesday for a public flotation which show it is a veritable money-making machine.
Facebook’s initial public offering, which will probably see shares begin to trade in early May, will value the company at more than $80 billion and probably closer to $100 billion. That’s a stunning multiple of the social network’s revenues which came in at $3.7 billion last year.
While the top-line figure may not seem to warrant a valuation that will make the Facebook debut the biggest in Silicon Valley, even compared to headline grabbing flotations such as Google and Netscape, digging into the financial data shows the potential of the company. Facebook has been on a sharp growth curve. Revenues, which for 2009 were just $777 million, grew to $1.9 billion in 2009, before hitting $3.7 billion last year. The profit margins that the Valley darling generates on those revenues are also eye watering. Pre-tax profit came in at $1.7 billion last year and the company has proven adroit at turning on new sources of income.
While advertising accounted for the bulk of revenues at €3.1 billion, payments and "other fees" revenues came in at €557 million. Facebook Payments was only introduced in 2009 and is the way people pay for virtual goods in Facebook. By far the largest user of the payments is Zynga, the creator of popular Facebook games such as Farmville, Mafia Warsand Zynga Poker. Facebook has cut a deal to get 30 per cent of all Zynga revenues it processes.
While the business generated through Zynga is impressive, a major risk is that the game maker accounts for 12 per cent of total revenues, or €445 million, and that revenue sharing deal expires in May 2015.
In a move reminiscent of Google’s inclusion of its “Don’t be evil” mission statement in its 2004 IPO prospectus, Facebook’s 27-year-old founder, chief executive and majority shareholder Mark Zuckerberg has penned a letter to potential investors, which is included in the filing.
“Facebook was not originally created to be a company. It was built to accomplish a social mission – to make the world more open and connected,” it opens. Some of the comments about the company’s ethos may come back to haunt him, particularly when he has major institutional investors pressing for a return on their investment. But while Zuckerberg claims to be a reluctant company founder, we now know that he has managed not only to build the most popular web service ever, he has retained total control of his company while also attracting some of the toughest and shrewdest investors in the world. While Zuckerberg owns 28.4 per cent of Facebook stock, which means he will have a net worth of about $25 billion post-flotation, he has structured the company’s shares so that he has 56.9 per cent of the voting power.
The other key executive at Facebook is 42-year-old Sheryl Sandberg, whom Zuckerberg poached from Google, to bring some “grown-up” management to the company.
Although she owns just 0.1 per cent of the company, and was paid a base salary last year of $300,000 compared to Zuckerberg’s $500,000, the prospectus shows that if she stays with the social network, she will become one of the few female members of the Silicon Valley billionaires’ club.
After the legal formalities, Facebook’s S1 document opens with a blocky graphic in Facebook’s trademark blue presenting the key metrics, which it clearly feels are essential to its future growth. The social network has 845 million “monthly active users” at the end of last year, an increase of 39 per cent from the previous year. Showing the engagement of its users, 483 million people use the site every day, up 48 per cent since the end of 2010. Another noteworthy feature of the prospectus is that the notoriously publicity shy Zuckerberg seems to have been persuaded to take the company public largely to provide a liquidity event for his early investors. The funds raised – somewhere between $5-10 billion – will be used for “working capital and other general corporate purposes”. While Bono’s Elevation Partners and a group of Davy clients will benefit should they sell their stock, some of the additional capital is likely to directly benefit the Irish economy.
Facebook has its international headquarters here and is reported to be looking to expand that 200-person operation further. International expansion will clearly be key if Facebook is to continue growing as a public entity.
Facebook will have to execute on several new revenue generating ideas, and continue to grow internationally if it is justify its valuation. If that valuation is $100 billion it is 100 times its net income. Applying the same multiple to Apple, the iPhone maker would be worth $3.3 trillion rather than its current $425 billion.
Front and centre of the risk factors identified in the prospectus is that “users increasingly engage with competing products”. Somewhere around the globe, a talented team of engineers is probably working day and night to displace Facebook from its perch. Zuckerberg and his team will be working just as hard to ensure they don’t become the next Bebo.
FACEBOOK BACK THEN: HOW IT WAS
IT WAS December 2007 in Silicon Valley and I was running late thanks to an unco-operative GPS. I was rushing to catch up with a group of Irish entrepreneurs who were in California to see what they could learn from the people behind the most successful businesses on the Web and Facebook was top of the list.
Finally I managed to locate the nondescript office building on Palo Alto’s High Street, which was home to Facebook’s developers. The social network had just opened to third-party developers and senior executives were keen to sell the advantages of writing apps for Facebook.
At that point, Facebook had 50 million users, half from outside the US, but even then they were heavily engaged. Each user was accessing 1,500 pages a month and Facebook Photos was home to three billion images – more than twice as many as all the dedicated photo sharing sites combined.
The ruthlessly open plan offices where staff worked at long tables and had access to limitless snacks and soft drinks were populated in the most part by people who looked like they should still be at high school. The average age was just 22.1 and the walls were covered in graffiti (which the artist was clever enough to get paid for in stock, making it, potentially, a $200 million paint job).
Fast forward to March 2011 and Facebook was looking like a very different company. Housed in a sprawling office complex on a leafy boulevard outside Palo Alto, parking spaces were now at a premium and fleets of buses waited to ferry staff to and from work. Executives visibly bristled when I produced my notebook and, while staff still enjoyed lots of perks, the laid back college atmosphere was long gone. Facebook is growing up fast.
