This past weekend, I bit the bullet and read the prospectus Facebook filed with the SEC for their upcoming IPO. It’s 200 pages and a good read for anyone who admires the success they have had. Here are some highlights:
Users. Developers. Advertisers. It is clear they understand well who their key stakeholder groups are and how each adds value to the others. Users benefit from being connected to their friends through an engaging platform. Developers benefit through access to a platform with a large set of users and an open graph. Advertisers benefit from being able to target their digital campaigns to a much higher degree than available alternatives. A well-defined ecosystem encourages each party to focus on their part, driving the whole business forward.
Clear Revenue Model
Advertising. Payments. That’s it. In the most simple form, Facebook has two revenue streams. Within each revenue stream, there is a clear market opportunity balanced with well-identified risks. Facebook now commands the highest market share of the online display advertising market. This revenue stream is at risk if user engagement decreases due to competitive services or advertiser interest decreases due to lack of effectiveness or stronger alternatives. Payments is a relatively smaller revenue stream, driven primarily by social games. This is at risk if Zynga and other larger third-party social game developers monetize their users on competitive platforms (such as iOS, Android, etc.) directly.
Unclear Mobile Monetization
The rapid growth in the adoption of smartphones, Facebook’s dominance as the top downloaded app on almost every mobile platform, and the lack of large-scale adoption by advertisers of the mobile platform have let to the perfect storm for Facebook; where their mobile traffic growth may cannibalize existing online traffic. The lack of monetization of their mobile traffic will become an increasingly important issue to address. Matt Hartley from the Financial Post has a good story on this theme.
Unclear Advertiser Effectiveness
Facebook’s ability to use personal information shared by its users to offer more granular targeting parameters for ad campaigns is phenomenal and unseen at this scale on any other platform. However, as competition in digital media (including online and mobile) grows to claim revenue moving from traditional media (such as radio, print and television) it is unclear whether Facebook will be able to protect its current trajectory of advertiser revenue growth. Every social network is incented to offer their social graph to improve ad targeting and each digital media destination will look to augment their advertiser offering to include this enhanced targeting ability.
Clear “Hacker Way”
Mark Zuckerberg describes the hacker way as “an approach to building that involves continuous improvement and iteration. Hackers believe that something can always be better, and that nothing is ever complete”. Facebook’s hacker culture has emboldened them to move fast, adapt to market feedback and iterate in a highly competitive marketplace. Their long-term ability to complete against the likes of Google will depend on their success in scaling the hacker way as they grow their team and number of offices. That being said, it is refreshing to see the results they have achieved by relying on this approach so far.