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How Facebook’s Declining Share Price is an Opportunity

Andrew Tonks

by Andrew Tonks on 6th August 2012

FacebookIt seems nearly every day there’s a new headline out there about Facebook’s share price hitting a new low. This week it past the US$20 mark, representing an almost 50% decline since its listing nearly three months ago.

Now I’m not going to discuss the reasons for this decline, there’s nothing new I can really contribute to this discussion on top of the masses amount of news out there already. However in my attempt to put somewhat of a positive spin on things, I believe this decline in long term could very well prove to be the making of Facebook.

So you might already be thinking I’m nuts, nearly US$50bn gets wiped off of the company’s value and I’m saying this isn’t all bad!!

 

Well hear me out first and I might very well change your mind…

According to Facebook’s first earnings report, the company’s revenue surpassed US$1.18bn in Q2 of 2012, 84% of which came from revenue from advertising. So Facebook is already making money from advertising, maybe not to the extent that investors expected and hence the declining share price. Whilst this doesn’t compare with Google’s advertising revenue (Google’s search engine generated some US$7.54bn in Q2 of 2012)it represents a significant amount for a company that’s less than ten years old. Last month Facebook also reported that it had a daily average of 552 million users in June, which is a 32% increase from a year ago. That means roughly one in every fourteen people in the world are on Facebook every day and it’s grown significantly year on year.

Looking at the above from an investor’s point of view surely the two main components are there for an attractive investment, significant revenues coupled together with a captive user base that is seeing growth. However, as the declining share price demonstrates, investors are not confident in the business as an investment opportunity – if they did they would be holding on to their shares, not selling them.

The above then begs the question – did the investors who bought into Facebook originally, really know what the business was all about?

Facebook’s own mission statement clearly states it’s their “mission to give people the power to share and make the world more open and connected”. It doesn’t state anything, anywhere, about being the world’s premier online advertising platform – in fact I struggled to find anything about advertising anywhere on their own About Us page.

This then comes to my point, if Facebook is already making money from advertising and has a captive audience that’s growing as a social networking platform, then why try to reinvent yourself as an advertising platform? Why can’t you make a significant amount of money just being a social network? Why assume the only way you can make money with Facebook is by selling advertising? Why not capitalise on the unique nature of Facebook over Google? Instead of trying to compete for online ad spend with one of the world’s most successful online businesses, why not capitalise on the uniqueness of the world’s most successful social network?

What I think Facebook risks doing by pandering the short-termism of investors is risking the long term future of the network itself. If Facebook continually puts the needs of advertisers before users, with the aim of continually improving profits, I am sure users will eventually be put off and either use the platform less or in the worse case leave.

In Mark Zuckerberg’s own words “We don’t build services to make money, we make money to build better services.” If this is the case then I believe Facebook should be concentrating on developing its platform further not for advertisers, but for users. It should look to monetise itself not solely as an advertising platform, but by creating useful services that people will want to use and would be willing to pay a premium.

In essence this is what Facebook has always wanted to do – create a platform which people can use to stay connected.

How this ties into my original point about Facebook’s share price being an opportunity, is that clearly the current way Facebook is structured will not meet the expectations of its current investors. With perhaps the power of hindsight, what Facebook should of done from the start with investors is state that if you want to invest in an online advertising platform invest in Google – if you want to invest in a social networking platform, then invest in Facebook. I appreciate this is looking at it through rose tinted glasses, but I don’t think they would be under the pressure they are under now with headline after headline of a declining share price if they had been upfront from the start.

By trying to position itself not as a social network that makes money mainly from advertising, but as a social network that makes money from social networking coupled with advertising, I think Facebook would be more able to attract the right kind of investors who would be sold on the idea of how the business plans to make money in future.

Well that’s all very well in an ideal world, but how could Facebook possibly do this?

Well for a start I think they could seriously look at the freemium route, they wouldn’t alienate their current users but at the same time they could try and incentivise people to sign up to premium accounts with additional features – things like phone/tech support for your account, everyone knows someone who’s had an account hacked into or has lost it all together and the admin involved in trying to claim it back. Also think of the limitless amount of storage space for photos Facebook uses, why not charge users when their storage capacity reaches a certain point? How about ad free accounts – why not charge users for the privilege of not seeing ads?

If you do the math on this it doesn’t sound that ridiculous. Facebook is getting about 500 million daily users each month, 50% on average log in each day. If only 1% of the 250 million people logging each day upgraded to a premium account priced at US$9.99/month, which is roughly the same as a Spotify premium account, that’s just under US$300 million a year just in premium account fees alone.

Other avenues they could look at is the freemium route but for business accounts. For numerous businesses their Facebook account/page is a key part of their marketing and proves to be a real source of revenue. Why not look at providing premium accounts for businesses?

I appreciate that some of my suggestions might be a bit ambitious, also the fact on Facebook’s home page it states ‘It’s Free and always will be’ could make this null and void, but technically running a freemium model would still keep Facebook free with the option to upgrade. Also, now that Facebook has shareholders to answer to, who will be expectant of ever increasing profits, the freemium model could become a very tempting option to increase profits without growing the network.

Well thanks for reading my thoughts, I would love to hear back from anyone – do you think the above is realistic? Can you think of any other ways Facebook can monetise itself? Do you think I am completely unrealistic and Facebook should be looking to compete more aggressively with Google for online adspend?

Andrew Tonks

Andrew Tonks

Andrew has worked within online marketing for the last four years with a background in domestic tourism, working with some of the country's most popular tourist attractions and destinations.

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8 Comments

  • Gareth Hoyle 6th August 2012

    Adsense-type product based on the social graph = Facebook’s money making potential realised!!

    Reply to this comment

  • Brad 6th August 2012

    Facebook should never have gone public. Its stated aims are at conflict with what what investors typically want to see from an investment. Sure fb makes money but any company that goes public always has to put the needs of its investors before even its own and certainly before its users. Happens that sometimes these competing needs are pulling together but all too often they are not. Going public was a silly decision I think motivated by the desire to gain a more liquid capital. They maybe should have looked at better VC options but I don’t know enough around the circumstance of their flotation to know whether they did that adequately or not. At any rate I would be surprised if fb ever managed to recoup its initial valuation.

    Reply to this comment

  • Brad 6th August 2012

    well I wrote an essay and somethign went wrong :( My point was fb should enver have gone public. Investor needs, which always have to come first at a PLC are not often well alligned with product/user needs. Certainly not on the internet at any rate. fb Should have looked at raising money through VC rather than flotation.

    Reply to this comment

  • Andrew Tonks

    Andrew Tonks 6th August 2012

    thanks guys for the comments.

    I defiantly think either Facebook listed too quickly or as you said Brad they should have thought of other ways such as VC to raise more money.

    Either way I think the short term challenge for Facebook is trying to turn the tide in the media and start getting some positives out there. Every day its about the share price hitting a new low – ongoing negativity is going to lead to even more negativity with the knock-on effect of further deflating the share price – get some positives out there and I’m sure they will be able to stabilise the share price.

    Reply to this comment

  • Todd S. 7th August 2012

    If they go the “freemium” route as you say, at least for user accounts, I believe would alienate the base and take Facebook further down the road of the online dodo bird….MySpace. I’m sure people would stick it out for a little while but the more it becomes apparent (right now most of the selling/advertising is still covert enough) that Facebook is out to profit the less attractive it will be to the end user.

    That being said I think the freemium model could work for businesses. Especially, for anyone that works on the B2B side of Social Media. Social Media mangers know that Facebook pages can be a bear to work with and if there was additional support for paid accounts I would jump on board and take my clients with me.

    Reply to this comment

    • Andrew Tonks

      Andrew Tonks 8th August 2012

      Thanks for the response Todd – comparisons between MySpace and Facebook are a bit difficult I think given that MySpace didn’t have the advantage of having the mass propagation of smartphone devices to help drive users to continually use their service. Now it’s not uncommon for people to be constantly connect to their account, which keeps users interested in the service.

      Why I think ultimately Facebook will need to think differently about how they generate revenue is the continued rise of mobile use and the lack of monetisation of the site on mobiles. Personally I cannot see how Facebook can start serving ads on mobiles without it being obvious to the end user – once users start to see the site as simply an advertising platform, I think they will be put off and could leave.

      Reply to this comment

  • Matt Burnett 8th August 2012

    Andrew, I recently wrote about the revenue opportunities for Facebook were it to develop it’s own mobile operating system. Such things as location-based advertising, charging for (native) apps through its App Center, possible licence fees for handset manufacturers and cloud services (e.g. storage, like you’ve suggested).

    http://matt-burnett.blogspot.co.uk/2012/06/could-facebook-develop-its-own-mobile.html

    Ultimately, Facebook has spent the first few years of its existence gaining an audience. Now that it’s reached that point it’s working out how to monetize them. I don’t think charging for extra bonus features would really help. How often do you envisage needing Facebook Tech Support, which would also be costly to Facebook? Also, what good would a premium feature be if you can’t use it with your friends because they’re not willing to pay for it?

    Reply to this comment

    • Andrew Tonks

      Andrew Tonks 8th August 2012

      Hi Matt,

      Thanks for the post – in hindsight I think you’re right regarding the freemium model for personal accounts but I guess just in terms of sheer numbers, it has the greatest potential to generate large revenues with quite a low conversion rate.

      Regarding tech support – a person’s Facebook account is increasingly becoming an online extension of one’s self. For many, years of their lives is now represented by their Facebook account and I genuinely think as more and more people become to realise that, they will want to protect it and ensure if something happens they can retrieve it, back it up ect…

      I have personally witnessed someone having their account hacked into an effectively stolen – the response from Facebook was abysmal and in the end my friend was so put off by the experience she stopped using Facebook. If there was the ability to speak to someone on the phone, I think this process would have been much easier and my friend would have continued using Facebook.

      Reply to this comment

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