Analysis: Is Facebook reaching the peak of its success?

Its IPO raises questions about whether it will thrive or falter

Facebook’s much-anticipated filing for an initial public offering (IPO) may have fallen short of some expectations. The social networking company plans to raise $5bn, half of what some analysts had predicted. But the technology community should not consider the IPO a trivial move by any means. This is will be the largest amount of money an internet company has ever raised for an IPO, and towers over the $1.67bn Google raised in 2004.

However, by filing for an IPO, Facebook has immediately placed a new level of pressure on itself, with investors scrutinising whether it has the ability to succeed in the long term, or whether it will follow the likes of Myspace and Friends Reunited and fall by the social wayside.

Is it likely that Facebook could face competition from a Silicon Valley newbie? Gartner analyst, Michael Gartenberg, believes that Facebook has been successful in cementing its position and it will take a lot for it to be usurped.

“At this point Facebook has grown to such a size, and the market has matured so much, that it would be very difficult for a smaller company to come along and unseat them the way that they unseated other companies,” said Gartenberg.

“However, this doesn’t mean that it isn't going to face challenges from larger companies like Google, for example, which has shown a very strong interest in driving social across all of its properties,” he added.

“But the idea that a small start-up is going to come along tomorrow and effectively challenge Facebook is a very unlikely scenario.”

Ovum analyst Adrian Drury argued that Facebook could fall victim to the same problems experienced by the likes of Google.

“Google has a talent retention problem, and it is likely that Facebook will face the same problem in the future, which could cause it problems internally and in the market. At some point Facebook isn’t going to be the hottest kid in the Valley any more, and some new business is going to be attracting the type of talent that Facebook is attracting today,” said Drury.

“This is because new businesses are on a growth curve and they are offering a financial incentive and offer stocks that make them an attractive place to work. Facebook will not be able to offer new talent the same financial upside in terms of equity, which could impact how innovative it is,” he added.

Analysis: Is Facebook reaching the peak of its success?

Its IPO raises questions about whether it will thrive or falter

Drury added that Facebook will need to be realistic about its future growth prospects in order to maintain its success, and will need to adjust its model for emerging markets.

“For Facebook to continue being a successful internet business it needs to be realistic about its growth prospects and realistic about the growth that it is going to see in different markets – markets that may not perfectly match its product,” he said.

“Facebook is currently hitting 50 per cent penetration rates in the US and the UK, which is brilliant, but the cost of acquiring each additional percentage point on top of that, at those penetration levels, increases dramatically,” he added.

“Consequently, Facebook is looking at emerging markets, where many countries are experiencing incredible smartphone growth. Facebook needs to push its integration with mobile devices to be successful in those markets.”

Facebook’s main source of revenue comes from selling data to advertisers who can target users with their products and services. It currently makes up 16 per cent of the US digital advertising market. Sundev Johal, analyst for Ovum, argues that for Facebook to maintain its leadership position it needs to ensure that its users remain interested in the product and don’t divert their attention elsewhere. If this were to happen, the market could quickly lose confidence in its ability to be the leading social network.

“The challenge, and it is a big one, is whether Facebook can keep its users active and engaged in a context where Google is pushing hard into social media and many home-grown social networks are looking to up their game,” said Johal.

“Scale is important, but engaged users are vital if Facebook is to build the critical mass of advertisers and commercial content providers that are central to its future success. Facebook will come out of its IPO under close scrutiny and if it fails to deliver on its promise quickly then its valuation will drop as investors lose confidence in the business model.”