Facebook announces IPO

Jan Dawson, Ovum Chief Telecoms Analyst

AUSTRALIA: Facebook finally announced its long-awaited IPO, which had become inevitable ever since the company breached the 500 shareholder number and triggered additional reporting requirements. As a result, the company has shared many financial details not previously disclosed, which make for interesting reading.

On the two most important metrics - revenue growth and profitability - the company is doing very well. Revenue has grown very strongly for the last two years, and with it operating income. When many web 2.0 and social networking startups still have a reputation for focusing exclusively on user growth, it's reassuring that Facebook appears to have been able to convert its 845 active users into both revenue and profit.

However, like Google, Facebook derives the vast majority of its revenue from advertising, although it is diversifying somewhat. As such, it is vulnerable both to the fortunes of the overall advertising market, and to major moves from Google in particular.

As Google seeks to ramp up Google+, it will eat into Facebook's share of the social networking market and with it Facebook's share of related advertising. In addition, since much of Facebook's revenue comes from gaming apps, as Google expands the gaming platform it is building with Google+, it threatens to dilute Facebook's relationships with Zynga, which accounts for 12 percent of its revenue, and other major partners.

Ironically, mobile advertising, which is one of Google's fastest growing opportunities, is non-existent today for Facebook, which doesn't display advertising on its mobile products. This represents both an opportunity and a threat for Facebook. Despite all this, though, Facebook is if anything increasingly dominant in the social networking space, and Google still has a steep hill to climb if it is to truly have a competitive impact with Google+.