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Can Facebook Live up to Market Expectations?


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Frost & Sullivan market insight on Facebook's IPO offering

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Can Facebook Live up to Market Expectations?

  1. 1. Frost & Sullivan Asia Pacific Market Insights Frost & Sullivan’s commentary on the Asia Pacific ICT industry, addressing opportunities, best practices and major events in the market.Week of May 21st 2012 Can Facebook Live up to Market Expectations? By: Phil Harpur, Audrey William and Andy WooIntroductionThere has been mixed reactions with Internet IPO’s from companies such as LinkedIn,Groupon, Zynga, and Yelp in recent years with not all of them have been having a successfulstart. Facebook’s initial market capitalization appears to be high and is based on an assumptionof high revenue growth projections for the next five years. Whilst Facebook appears to be in avery strong position to leverage its global reach as the world’s largest social media site withclose to a billion users, questions remain about its ability to monetize that user base.Facebook’s Advertising Model Remains Immature but has huge PotentialWhile Facebook is already mature in terms of number of social media users, and facing growingcompetition from Google in this area, it is still relatively immature in terms of its onlineadvertising model, which is where the vast majority of its revenues currently come from.Facebook is currently finding it difficult to compete with Google’s more mature and moredeveloped advertising platform. To gain full industry confidence it will be critical that it spends alot of time and resources developing its advertising model further. Last week for example,General Motors withdrew its $10 million advertising budget from Facebook.On the flip-side, Facebook’s immature online advertising model, combined with its massiveglobal reach, gives it huge potential for very high revenue growth over the longer term andcompete head on with Google in terms of advertising revenues. Google on the other hand,while still displaying solid growth in online advertising revenues, no longer has the potential forsuch rapid growth due to its more mature advertising platform. While Facebook’s user base iswell represented across most geographic segments globally, from a revenue perspectiveFacebook is still heavily skewed more towards North America. There is a huge opportunity togrow revenues in emerging markets such as Asia where Facebook is yet to adequatelymonetize the user base, and current Average Revenue per User (ARPUs) is much lower.Market Insight Page 1 of 3
  2. 2. Other Business Models will become Increasingly ImportantFacebook has also only just begun to explore new business models and opportunities in areassuch as online shopping, similar to the way that Google is now diversifying its business modelfrom its origins as a search company only. We can expect to a lot more action from Facebook inthis area during the next few years.Facebook Credits, a virtual currency for games and linked to gaming apps that runs onFacebook such as Zynga, is a rapidly growing revenue stream for Facebook and is becomingincreasingly important to its overall revenue model. Facebook needs to evolve these platformsand continue to make them relevant to the user. At present such revenues constitute a relativelysmall component of its overall revenue base. As growth from the advertising business slowsdown, they will play an increasingly more important role in Facebook’s future success.Facebook has been so far successful in making its online platform highly interactive throughapplications that enable the sharing of media such as photos, content, and videos. Facebook’srecent Instagram acquisition is one example of how it is transforming its platform into a one-stopshop for social media communication and collaboration. In coming years it is critical thatFacebook continues with this strategy and develops a richer communications platform whereusers can not only use Instant Messaging and make phone calls, but have access tofunctionality such as videoconferencing sessions. Current market indications are that Facebookis fairly well placed to succeed with this strategy over the longer term.The Mobile platform remains one of the weakest links in Facebook’s advertising strategy.Besides having a mobile interface for both Apple and Android, Facebook is yet to fully tap intoand monetise this channel. Whether Facebook starts to develop its own mobile operatingsystem to compete head on with Android and Apple, will be key in the battleground of the globalmedia giants over the coming years. Other possible moves for Facebook include thedevelopment its own branded tablet, however for such a move to succeed it would be critical forFacebook to entice the application developer community to migrate to their platform. As theirstrategy matures, there is no doubt that an increased emphasis on this rapidly growing channelwill be a key part of Facebook’s growth journey.Another critical question is how Facebook will partner with the telco’s and mobile carriers. Inorder for Facebook to diversify its business model, these types of relationships will play anincreasingly key role over the next five to ten years.Privacy Issues Could Potentially be a Stumbling BlockWhilst the opportunity for Facebook is immense, one area where it will need to exercise cautionis in the area of privacy. Regulation by country around privacy could even potentially limit itsgrowth and ultimately its revenues. In recent years many Facebook users have complainedabout privacy settings and in some cases users have withdrawn their membership entirely. Thiscould potentially lead to more serious consequences for Facebook especially amongst countrieswith governments that have stricter laws on consumer issues such as China, which has in facthas completely banned Facebook.Market Insight Page 2 of 3
  3. 3. ConclusionIt is critical that Facebook gets its strategy right at this juncture, not just with regards to theonline advertising model, but in other areas of the business such as online gaming apps,content and application sharing, and mobile platforms (both for smartphones and tablet PC’s). Itis also important that Facebook addresses the issue of privacy if it is to achieve the highexpectations set by the market. However with such strong potential for natural growth of thebusiness model over the next five years, and with nearly one billion users to tap into, the longterm outlook for Facebook appears to be very solid.This Market Insight was authored by Phil Harpur, Audrey William and Andy Woo of Frost &Sullivan’s ANZ ICT practice.For media queries or more information, please email djeremiah@frost.comMarket Insight Page 3 of 3