Unless you’ve been sleeping under a rock lately, you already know that Facebook has gone public with their IPO. Despite the hype leading up to it, the IPO has gotten off to a pretty rocky start, and is already facing criticism from all sides, with many reporting it was overvalued and with multiple investors already filing lawsuits due to huge losses on their investments. Google and Facebook share some similarities, and many predicted that they would have the same successful start to their public debut as Google did. So what happened? Why did Google’s IPO do so much better than Facebook's?
Let's look back to when Google first went public in August of 2004. Google back then, like Facebook, was a technology company that had a huge impact on how people behave. The company was new, the stock was hot, and its public offering went in a completely different direction than Facebook’s. Google’s stock was priced at $85 a share, opened up at $100, and closed at $100.34. Google ended up closing the year at $194 per share, and investors in the IPO were very happy with its healthy gains.
Let’s fast forward to May 2012 and have a look at Facebook’s IPO. Like Google, Facebook is also a technology company that directly affects how people behave. Communication wise, it’s probably one of the biggest inventions since the telephone. The public offering on FB was one of the biggest in history, and the company was initially valued at 104 billion dollars with a share price of $38. What's happening now? So far, shares have fell almost 9%. Since the initial price of $38 a share, shares have now fallen to $31, and the company's total value has decreased from 100 billion to 85 billion in literally less than a week. Lawsuits are flying in left and right, and financial regulators are investigating whether banks in charge of Facebook’s IPO broke the rules by releasing negative reviews about Facebook to big investors while saying nothing to the general public.
What Went Wrong
This is very tough to answer, and if you ask 10 people you could very likely get 10 different answers. But there are a few reasons that make it seem a bit obvious on why Facebook is off to a rocky start and why I think that they will never have Google’s success. Comparing Google’s search business to Facebook's social media “business” is like comparing a monkey to a spaceship. I’m no stock market typhoon or financial investor, but I’ll say again now what I always say to all the FB worshipers: Social media isn’t a business in its current form. How is it possible that people view it as one when there isn't even a real way to measure the return on investment?
What a lot of people don’t know is that Facebook, with its damn near 1 billion members, still only makes a very measly $5 per user, and that amount is shrinking. The New York Times however, who are viewed as an “old” digital business, still have a value of $1000 per customer. Facebook on the other hand can only grow as a “business” if they are able to add new customers at a faster rate then the average value per user declines, meaning they are CONSTANTLY having to balance that equation.
Another thing that hurts Facebook is the fact that their sales cycle is, as J.C Kendall puts it, “ass backwards” when compared to traditional companies. Ads don’t make people go shopping. In MOST cases, people decide what they need BEFORE pursuing it. Ads can spark a feeling of “I need that”, but this occurrence is rare. In most cases, people become aware of what they need, and then they.......what? You guessed it...they SEARCH for it. And where do people search? Why on Google of course. With all the indexed information Google has (including the newly indexed Facebook comments), how can anyone honestly believe that Facebook's business model can compete in the same way as Google does?
Stay tuned for part 2 as we discuss further why comparing Google and Facebook simply isn't logical.
Sources: technologyreview.com, forbes.com, guardian.co.uk, socialmediatoday.com (personal views expressed throughout)
Picture credits: pj-firepower.com