The pieces are in place for Facebook’s IPO next week—not only has the company set its stock price range and updated its Q1 numbers, it has also attempted to de-risk the biggest perceived risk in the first draft of its S-1: exposure to mobile competition. Facebook bought Instagram for $1 billion, which ostensibly will help it approach mobile social interaction in a more engaging way. But it hasn’t done anything to address its exposure to other addictive consumer applications that could whittle away at its users’ engagement over time. Namely, the most risky applications involve social commerce, and the elephant in the room as it relates to physical goods, not virtual goods, is Pinterest.
There are rumors that Facebook will announce a major eCommerce move just before its IPO in May. That is still possible, but given that its social commerce brainchild, Beacon, flopped in 2007, an unproven eCommerce-related endeavor branded by Facebook would be a hugely risky move. Unlike its answer to potential competition in the mobile space, Facebook is leaving eCommerce risk unanswered one way or the other.
In a Forrester report last April entitled, Will Facebook Ever Drive eCommerce? Demystifying The Hype For Retail eBusiness Executives, analyst Sucharita Mulpuru summarized:
“In spite of the fact that hundreds of millions of people around the world have Facebook accounts, the ability of the social network to drive revenue for eCommerce businesses continues to remain elusive. eBusiness professionals in retail collectively report little direct or indirect benefit from Facebook, and social networks overall trail far behind other customer acquisition and retention tactics like paid search and email in generating a return on investment.”
Is it possible that Facebook has concluded it is simply a social destination (and I use “simply” lightly because becoming a huge social destination with metrics like it has is not simple) that will engage users and disrupt the online (and ostensibly mobile) advertising spaces? Like Google, Facebook’s predominant source of revenue is advertising. Facebook’s payments and credits program generates revenue through social gaming, but this is largely contributed by Zynga. Like Google, Facebook has not proven that it can incubate and release vertical user applications that are monetized through means other than advertising.
However, Facebook is planning to go public at a valuation four times the size of Google’s IPO valuation. I see no other way to justify this without a belief that Facebook has a more diversified revenue base than Google, and that isn’t certain. Yes, it has a myriad of opportunities to grow its advertising revenue, but if you believe Facebook’s valuation could double over time (and you should if you plan on buying it), you should be betting on its advertising revenue growth and not potential diversification through eCommerce or other related streams.
I would expect that new companies, Pinterest included, will continue to take the eCommerce route in an effort to compete with Facebook. It’s my bet that someone other than Facebook will solve the social commerce experience for physical purchases, and this should be a very interesting space to invest in over the coming months.