It should have been a revival of sorts for Web 2.0 public floats. Instead, the social networking giant Facebook’s IPO is turning out to be a dampener, raising questions about its knock-on effects on the fortunes of other social media hopefuls.
Facebook’s uninspiring public debut – its shares closed down 11 per cent on Monday from its opening price of $US38 – appears to have been given a big thumbs-down from the investor community, leading to accusations over its overblown valuation. Technical glitches at Nasdaq on its first day of trading did not help.
Shares of other social media companies have already fallen prey to this scepticism. Shares of gaming company Zynga, social networking site LinkedIn, and online group buying site Groupon, all fell in the past couple of days.
So what’s behind this waning enthusiasm? Not least among the reasons is that Facebook has yet to prove a convincing business model that would justify its mind-boggling $US104 billion-valuation. While its vast base of over 900 million active monthly users is impressive, the lack of real, measurable ways to monetise that wealth of data – and related user behaviour for potential marketing dollars–just does not seem as straightforward as counting the number of friends on someone’s friends list.
That big blur combined with Facebook founder Mark Zuckerberg’s promise to keep the site free of charge, should have rung loud warning bells from the get-go of the underwriting of this float. Instead, it was conferred a valuation that was over 100 times its earnings by its underwriters who appear to have overestimated the demand for a piece of its equity of this massively popular site, according to reports.
Indeed, some of its customers are starting to show signs of disillusionment. Last week, General Motors said it was pulling its advertising from Facebook just days before its IPO float. Its average revenue per Facebook user was $US1.17 in the first quarter, down seven per cent from the same quarter the previous year, according to a Wall Street Journal report that cited Bloomberg.
But perhaps what Facebook and other social media companies are up against in the long-term is not just a notoriously challenging Internet marketing landscape, but the limited scope and cyclical nature of marketing and advertising spending by companies, if it is – indeed – mainly the marketing dollars they are after.
To put this in perspective, even heavy consumer advertisers such as Coca Cola had a total advertising spending of $US3.3 billion for the full year ending 2011. While the combined marketing dollars of companies may still store a vast untapped potential, online advertising rates still remain woefully low compared to the rates of traditional media of print and television advertising, and have some catching-up to do.
Twitter CEO, Dick Costolo, recently said the microblogging site had no immediate plans for an IPO and was sufficiently funded. It should probably wait much, much longer should it change its mind.