TOPICS > Economy

Post IPO, What Are Facebook’s Challenges Now?

May 18, 2012 at 12:00 AM EST
The public sale of Facebook shares on Friday didn't soar as some had expected. Margaret Warner talks to Arvind Bhatia of Sterne Agee and Rob Cox of Reuters' Breakingviews about what Facebook needs to do to keep its audience and advertisers.
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MARGARET WARNER: Facebook made its debut as a publicly traded company today, but investors didn’t like the stock as much as many had expected. Traders also reported some technical problems with orders to buy and sell the stock. Still, it was a big day, as the initial public offering became the third largest on record.

The widely anticipated stock offering finally got under way when Facebook creator Mark Zuckerberg rang the Nasdaq opening bell from his company headquarters in Menlo Park, Calif.

MARK ZUCKERBERG, founder, Facebook: In the past eight years, all of you out there have built the largest community in the history of the world. You have done amazing things that we never would have dreamed of. And I cant wait to see what you guys all do going forward.

(CHEERING AND APPLAUSE)

MARGARET WARNER: Shares in the social networking giant opened at $38. And in the first 30 seconds of trading alone, 82 million shares traded hands. But after hitting a high of $45, the stock ended up gaining just 23 cents over its opening price.

That meant the company raised more than $16 billion from the IPO.

MAN: It’s Facebook.

MAN: Facebook.

MAN: Facebook.

MAN: Facebook.

WOMAN: Facebook.

MARGARET WARNER: The event was heavily hyped for days, and today, it generated buzz on the street and on the air.

WOMAN: This is expected to be huge. This IPO has hit the mainstream, as Cramer had mentioned, with kids even wanting to put in orders, and you can see that excitement here in Times Square.

MARGARET WARNER: All this was a far cry from 2004, when Facebook was born in Zuckerberg’s college dorm room at Harvard.

ACTOR: People want to go on the Internet and check out their friends, so why not build a website that offers that?

MARGARET WARNER: Zuckerberg’s story, and the site’s explosive growth, was dramatized in the 2010 Oscar-winning film “The Social Network.”

Two years later, the company has 900 million users worldwide and counting. After today, it’s now valued at more than $100 billion, and Zuckerberg still will control about 60 percent of the voting shares.

But he insisted today that going public will not change Facebook at its core.

MARK ZUCKERBERG: Right now, this all seems like a big deal. Going public is an important milestone in our history. But here’s the thing. Our mission isn’t to be a public company. Our mission is to make the world more open and connected.

MARGARET WARNER: Still, as Facebook enters the next phase of its life, some are asking if it can live up to the value the market put on it today.

About 80 percent of its revenue currently comes from advertising. Yet just this week, General Motors canceled its $10 million ad budget for the site. The automaker said the ads weren’t selling cars. Facebook also faces the challenge of adapting its advertising model to the growing mobile device market.

For a closer look at all this, we turn to two people who have been tracking the company and today’s developments. Arvind Bhatia is managing director and an equity manner with Sterne Agee Financial Services, a brokerage firm. And Rob Cox is U.S. editor of Reuters’ Breakingviews, a financial news website.

Welcome, gentlemen, to you both.

Rob Cox, beginning with you, so what did you make of today’s IPO? Did it fail to live up to the hype?

ROB COX, Reuters Breakingviews: You know, it was the best and the worst of American capitalism writ large.

I mean, you had $100 billion company go public at which none of the people who went public with it today actually made any money. If you bought the stock, you didn’t make any money, right? But a hundred billion dollars of value was created. It had all of the hype. It had all of the sort of excitement that we have in capitalism.

And remember, it’s an incredible creation, 900 million people connected around the world. It’s brought joy, tears, laughter, annoyances, all those things. But at the same time, it was sort of the ultimate deal of the 0.1 percent, the thousand or so people without got in before it went public and it had $100 billion valuation. It’s extraordinary.

MARGARET WARNER: Arvind Bhatia, What would you add to that, the best and the worst? Do you think it is a disappointment to the investors?

ARVIND BHATIA, Sterne Agee Financial Services: Well, clearly, I think people are expecting a bigger increase in the stock price after the first day. Normally in things like this, investors expect 10, 15 percent increases day one.

So, that didn’t happen. But I want to put that in context a little bit. Keep if mind that over the last few weeks, the underwriters, which are the people who brought, helped the company come public, they were raising the price, the offering price of this deal. So that also caused some of the upside that we would have expected today to kind of go away.

But I agree with Rob. Overall, I would still consider this as a big success for an eight-year-old company started in one person’s dorm, again, a symbol of American capitalism, no doubt.

MARGARET WARNER: And so, Rob Cox, as you said, this is more than $100 billion. Do Facebook’s revenues — I think that’s something like a hundred times last year’s earnings. Do Facebook’s potential revenues justify that value?

ROB COX: Well, look, nobody can take numbers — and, I mean, there are tons of analysts who have come out and sort of reverse-engineered an argument for supporting the stock, so you can say we know it is $100 billion. Let’s figure out a way to actually make a bold case for this. Let’s look at the numbers.

We can say it is going to be a slice of the advertising market and therefore it will look like this. It should have the kind of information that people will pay a ton of money for. It can be like a credit rating agency. There’s a million ways to kind of try to come up with a number, a numerical valuation for this company.

But at the end of the day, what people are betting on is that 28-year-old hoodie-clad kid, Mark Zuckerberg, coming up with a way to take the 900 million people that he’s got connected, and all of the information that they have willingly given to him and find a way to make it work.

And I think there’s just — a lot of people are talking about faith-book, right? There is faith in Mark Zuckerberg’s ability to do that. And I think that is really the only way that people can justify paying $38 to $45 a share or anything for the next couple of years for this stock.

MARGARET WARNER: So, Arvind Bhatia, this is really predicated on faith in the future?

ARVIND BHATIA: It is.

But I think there is history behind this. Eight years ago when Facebook was just starting, you had a company called Google go public. And at that point, they were disrupting the billions of dollars of advertising market. Currently, that is a $600 billion market, by the way. And they did that with search.

And today that’s happening with social. So I think people have something to look at as history and point to where things can go. Clearly, what Rob is saying, you know, about the number of people there on Facebook today, 900 million people, that we think will be a billion-and-a-half people.

And that excludes China, where there is another half a billion people on the Internet today. You could assume some percentage of that people would come on Facebook if they are able to get in that country.

MARGARET WARNER: Go ahead, but so what are Facebook’s challenges in trying to live up to that? In other words, what do they have to do that they haven’t done now?

ARVIND BHATIA: Well, the biggest task, I think they have to first continue to make sure that the user experience, you know, is really strong, people want to come back and get value, they want to spend 15, 20 minutes a day. That, they have to continue.

Then from there on, the number-one task there for Mark Zuckerberg is to keep that audience. Then Sheryl Sandberg, the chief operating officer, her job is to convert that audience into money. And the way they would do that is to continue to target the ads that advertisers put on Facebook in a very meaningful way, that, you know, the returns that advertisers get become bigger and bigger. So those are two things they have to do in the near and longer term.

MARGARET WARNER: So, Rob Cox, back to you on the advertising. First of all, you had GM pull its advertising budget, upcoming one. What are the challenges for Facebook to grow this advertising and also on the mobile devices?

ROB COX: Yes, I mean, I think those are the two, the big questions. And clearly — certainly the mobile advertising issue was one that Facebook itself highlighted in the prospectus of the IPO as a potential risk factor.

But looking at GM’s decision, or to come out public and say that it was reducing its Facebook advertising is quite interesting, because it tells you that they don’t feel that they’re getting a satisfactory experience or results from that advertising, which means to Arvind’s point that they need to go back, Facebook and Sheryl Sandberg, and they need to figure out, well, what can we do with user experience to make it more effective?

And that is a very delicate balance, because as we al remember with MySpace, or as a few people might remember, actually, with MySpace, was the more intrusive the experience is, the less good the experience will be for the users and they will walk away. So it’s quite a difficult balance. And at the same time, we’re just talking that is really about the computer experience, you know.

When we talk about things like mobile, it’s a whole different game. And we are all moving much, much more aggressively than I think anyone would have thought a couple of years ago into using mobile devices to access Facebook and all other manner of websites and information.

And there’s no clear way to make and monetize that experience for advertisers. So these are, you know, twofold pincer movement that Facebook is going to have to face.

MARGARET WARNER: And, Arvind, can you explain briefly though why is the Facebook model hard to apply to a mobile, a handheld mobile?

ARVIND BHATIA: Well, think of it as, you know, the real estate on a mobile phone is very limited.

So the opportunity is to show a lot of ads, therefore, is limited. But at the same time I think what we are forgetting is that mobile is another way that we are accessing Facebook or other websites. What Facebook’s goal is to keep their website sticky. In other words, they want to you keep coming back, whichever way you want to access it.

So I think that people will supplement their use of Facebook through mobile. It’s not going to be either/or. And as long as that is happening, over time, I think Facebook and other companies will find a better and better way to show us ads that are relevant. They just started doing that in March.

So the revenue they’re getting from mobile today is zero. And so I would look at that as, yes, a near-term risk in terms of the transition, but long-term a huge opportunity that is untapped. About half a billion people are accessing Facebook through their mobile phones. And mobile phones are getting smarter. So that’s how they will get better at it over time.

MARGARET WARNER: All right, well, I have to leave it there.

Arvind Bhatia and Rob Cox, thanks, both.

ROB COX: Thank you.

ARVIND BHATIA: Thank you.