For the most part of 2011 there were persistent rumours of Facebook going public at some point in 2012. If this happens, it’s set to be one of the most eagerly anticipated listings in recent times, with some predicating an IPO (Initial Public Offering) that would end up valuing Facebook at up to $100 billion. As the world’s largest social network, with 400 million people accessing the site each and every day, Facebook has become an integral part of a tremendous number of people’s lives.
With so much data available on each and every one of those 400 million daily users, Facebook has also become a very powerful advertising platform, and forms a major part of many business’ online marketing strategy.
If however Facebook goes public, it will fundamentally change the nature of the business and is bound to affect not only the users of Facebook but also the businesses advertising on it. Also a $100 billion IPO of Facebook will have a lasting impact on the landscape of the online marketing industry as a whole.
In light of this, I have put together some predictions on how an IPO of Facebook might change the company itself, the online marketing industry as well as the businesses that compete with Facebook in terms of online advertising spend.
1. Transparency & Profits
As Facebook is currently not a publicly listed company, it is under no obligation to publish financial data with much of its financial success mere conjecture. However if Facebook passed the 500 shareholder mark, which it is expected to do sometime in the first half of 2012, then it will be legally obliged to publish quarterly financial reports. The publication of financial reports will give far more insight into what extent Facebook has monetised itself and how successful its advertising platform is compared to the likes of AdWords or adCenter.
An IPO will also make the business accountable to its shareholders, who will put pressure on management to increase revenue and profits. With this in mind, I would imagine Facebook’s advertising platform to become far more user friendly and to be promoted far more heavily to help entice as many advertisers as possible onto the platform. This I predict might entice some advertisers away from traditional pay-per-click advertising, given the rising costs seen for popular search phrases in AdWords for example. This would also mirror the effect Google originally had on the advertising industry as a whole whereby advertisers were enticed into pay-per-click given the reduced costs when compared to print or TV. Whilst I am not saying this is going to be the end of AdWords, I am sure it will have an affect on the amount businesses spend on the platform.
With an IPO making Facebook accountable to shareholders who are looking to see a return on their investment, I would also expect to see a spate of buy-outs by Facebook to help drive revenues further than what is currently being achieved. This is a strategy that both Google and Microsoft followed on numerous occasions over the years to either increase revenues or enhance their current product offering.
Some of the more high profile examples of this is Google’s acquisition of DoubleClick in 2007 and YouTube in 2006, or Microsoft’s purchase of Skype in 2011 and Hotmail in 1997.
3. Company Culture and Ethos
For most startups, offering generous stock options is an effective way of minimising startup costs and was used extensively by Google in its formative years. The IPO of Google back in 2004 made approximately 900 employees overnight millionaires, including a chef and a masseuse, but less than four years later nearly one-third of the company’s 500 original employees had left.
It is not unreasonable to expect that Facebook would go through the same process, given that now about 30% of the business is owned by its employees. Most employees would be contractually obliged not to cash in their stock in the short term, in the medium term I would expect a large proportion of the talent that had a vested financial interest in the business to leave.
4. Start Ups
As stated earlier, Google’s IPO made nearly 900 people overnight millionaires. Many of these people eventually went on to start their own ventures with numerous successful tech startups being founded by former Google employees. Site’s like FriendFeed (purchased by Facebook), Mixer Labs (purchased by Twitter), ReMail and Aardvark (both purchased by Google) were all started by former Google employees.
Facebook has many talented employees who in many cases have thought up, developed and launched some of the most successful aspects of the site. With many of these talented and creative employees set to become millionaires with a Facebook IPO, I would expect many to move on in the next few years to start up ventures of their own. What they develop is anyone’s guess at this stage, but I’m sure there’s bound to be an idea or two that the likes of Facebook, Microsoft or Google will end up buying out – much in the same way start ups by former Google employees have been snapped up.
5. Cost of Facebook Advertising
My final prediction of what an IPO could cause is an increase in the cost of advertising on Facebook. Once Facebook has shareholders to answer to they will come under far more pressure to make their system more user friendly to drive more businesses to sign up and advertise. Making the system more user friendly and promoting it far more heavily will increase the amount of competition between advertisers for ad space, thus inflating prices over time.
This again is a pattern seen by Google in its formative year, where the low cost of pay per click advertising relative to traditional media like TV, radio or print lured many traditional retailers and advertisers into online advertising. That process over a number of years created an environment of increased competitive bidding for popular search terms and thus inflated their cost.
The upshot of this however could mean that Google will be forced to compete more aggressively than it does currently for online advertising spend. This could manifest itself in either Google developing a far more diverse product offering, in order to retain advertisers, or we could see a reduction in prices, as there might be less competition for ad space with advertisers migrating towards Facebook.