Analysis: the IPO blues - and how to avoid them

By Peter Gothard
17 Sep 2012 View Comments
facebook-nasdaq

Facebook’s public share offering could well go down in history as the beginning of the end for the social networking company. It was in the weeks running up to Facebook’s 18 May 2012 IPO that the world began to question how, and for how much longer, Facebook was going to make money.

It’s a question that’s now being levelled at all advertising-fuelled web businesses, and so far the answers coming from the markets have been far from reassuring.

Further reading

It’s largely by selling advertising that Facebook, Myspace, Bebo and countless other social networking destinations before them were made, and eventually broken. But Facebook doesn’t just risk becoming another has-been; it could be the last of its kind.

Users are increasingly accessing social networking sites on their phones - inhospitable devices for advertising, which demand shrewder ways to effectively reach audiences than simply slapping a targeted advert on a page.

We are instead entering a time of sponsored tweets, cunningly gamified audience feedback techniques and “freemium” services where once paid-for products and services are provided free of charge in exchange for carrying focused, timed advertising or consistent banners.

Facebook has so far enjoyed little success in attempting to keep up with this evolving field. Its shares launched at $38 in May, and are worth only $18.95 at the time of writing. Meanwhile, users have been reacting to its dated privacy policies in the same way that advertisers have been responding to its short-sighted ad hosting: by moving away. Many are turning to the likes of Twitter, Pinterest and FourSquare, which allow people to interact meaningfully and creatively beyond simply listing their lives in an open feed, while holding back personal details.

Facebook is starting to hurt, and its pain is spreading. Facebook, after all, has become its own ecosystem; many applications and games owe their very existence to Facebook’s infrastructure.

One company that grew on the back of Facebook is Californian games developer Zynga, which became a household name with the launch of FarmVille in 2009. Last year, a few weeks before its own IPO in December, the company took steps to distance itself from the social networking giant, with the announcement of its own gaming platform, dubbed Project Z. The move, however, failed to disguise the fact that Zynga was becoming a slowly diminishing force in an increasingly crowded Facebook games market. The subsequent IPO opened with shares at $10. By the end of the day, they were worth $9.45, and at time of writing were down to $2.93.

Zynga’s March 2012 decision to buy fledgling app company OMGPOP – developer of faddish Pictionary-alike Draw Something – and promise of similar deals later, caused the shares to drop 13.9 per cent within days. And after Draw Something downloads fell off a cliff in April, 50 per cent was wiped off Zynga’s stock price.

Another company that has suffered post-IPO blues is Groupon. Oddly, the scheme – which offers loss-leading discount coupons – is a victim of its own success. As Groupon’s popularity grew, so did its partners’ losses. On top of that, companies linked to the service began to resent being seen as having “bargain” brands and products. Groupon went public on 24 October 2011 valued at $12.7bn – $18 a share. At the time of writing, shares were worth $4.26 each.

LinkedIn and Yelp are comparative success stories, largely because they offer unique, personalised monetisation solutions. LinkedIn, which has become the business social networking site of choice since launching in 2003, mainly monetises the value of its information: premium accounts and paid hiring solutions receive extra information as part of a paid membership. It launched to IPO valued at $4bn, and is now, after a dip in December, worth $13.6bn.

Yelp, which launched in March and is going great guns, puts users in touch with local businesses who pay for sponsored listings.

LinkedIn and Yelp have thrived since their IPOs because their business models are widely perceived to be sound and sustainable. Facebook, Zynga and Groupon, on the other hand, all suffer from the same general problem; a lack of confidence among investors in their ability to grow revenue and increase profits.

 

 

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