By Ane Howard – tech reporter – article updated May 28, 2012
Advertising revenues are questionable and the “S” shaped adoption curve
SAN FRANCISCO (Hollywood Today/RushPRnews) May 25,2012 –
A week after the recording-breaking yet broadly disappointing Facebook’s IPO, the world’s most used social network, troves of information that was not available initially has been exposed to the public. As of today, shares of Facebook (FB) are down 98 cents, or 3%, at $32.05, way down from the pre-market session and expectations.
Facebook claims to have 900 millions users and to be still growing but is the user growth nearing an abrupt slowdown?
Philippe Bouzaglou,creator of the social graph, a former Harvard classmate of the Facebook founders and the CEO of the Montreal-based start-up Geistr,(http://www.geistr.com)said to me that “networks such as Facebook have an adoption curve which takes the shape of a stretched out “S”. Bouzaglou elaborated saying that “First the user growth is steady but slow, then there is an inflection point, which gives way to explosive growth. Later, another inflection point is reached and the growth returns to slow and steady.”
Not meaning to appear too cynical but could it be that Zuckerberg and other executives at Facebook had been aware of this and tried to time the IPO with the peak in user growth to give investors the impression of massive and sustained growth in user numbers? The problem with this approach for the investors is that some of the inherent characteristics of the type of network that Facebook has built leads to quick and explosive growth followed by a sharp rather than a smooth slowdown. So investors who are planning to sell early as soon early signs of a slowdown in growth appear might be unpleasantly surprised when user growth grinds to a halt without warning.
Do you know of other risks to Facebook’s growth or valuation?Or are you optimist in its success? Use the comments section to tell us which dangers you think the stock might be facing.
So what’s the deal with advertisers on Facebook?
Advertisers, whether or not they like Facebook, spend big dollars on the social network. There is no doubting that the lion’s share of Facebook’s $3.7B in revenue comes from advertising. And in order for advertisers to keep spending money, the advertisers must see good results. It must show a decent return on investment (ROI),right? Not necessarily. Look at General Motors ceasing to advertise on Facebook, citing it as ineffective for their market. Surprising? Not really. Let me ask you, how often do you click on a Facebook ad? I have over 1,000 Facebook friends and as I inquired within my social group, I discovered that out of the 150 respondents, not one of them admitted to clicking on one single ad. Ever. GM is only one company citing poor Facebook ads results. With 900 million users, the perceived poor ROI may simply imply that Facebook has not yet found the right metrics to explain its real value to its advertisers base.
But who is really advertising on Facebook?
Maybe a clue is Facebook’s large presence at affiliate summits* and other events for “affiliate marketers,” often referred to as “spammers” in the online marketing world. Affiliate marketing is a loosely used term to describe “performance-based marketing in which a business rewards one or more affiliates for each visitor or customer brought about by the affiliate’s own marketing efforts.” These are the people behind the “Punch the Monkey” ads and the flashing banners telling you that you’re the millionth visitor and the winner of a a nebulous prize if you’ll just take a survey and give them your credit card number. They are also responsible for all those tweets taunting you to click on unwelcomed links and for those completely irrelevant comments on your blogs with a link to a service. Comments so pesty that many of us with blogs have been forced to disable our comments box. Of course, not all affiliate marketers are spammers but a LOT of cleaning up is needed in the industry.
Common knowledge is that to see profit growth a company requires to sustain valuation. Trading at close to 30 times revenue (compared to 5.5 for Google) and a P/E ratio of over 100 (18.5 for Google), Facebook is clearly seen by investors as a growth stock. We have to wonder though, how much growth can reasonably be expected and if such optimistic expectations could ever be met.
Often-quoted investor arbitration lawyer Andrew Stoltmann , believes that “Facebook’s advertising revenue would have to grow 41% every year for the next five years to sustain such numbers.” Put this way, this kind of growth seems wholly unrealistic for any company. To achieve even a fraction of that growth, Facebook would need to continuously grow its user base over that period, a feat that seems difficult given some of the inherent characteristics of the social graph.
Scamworld: ‘Get rich quick’ schemes mutate into an online monsterhttp://www.theverge.com/2012/5/10/2984893/scamworld-get-rich-quick-schemes-mutate-into-an-online-monster