Facebook IPO bolstered by third-party developers
Facebook’s flotation has revealed that 12% of its revenue in 2011 came from social gaming company Zynga, with the social media giant admitting its performance will become increasingly reliant on new innovations.
Facebook filed its much-anticipated IPO this morning, ending months of speculation as to when it would go public.
The social media giant is looking to raise $5 billion, valuing the company at up to $100 billion. The last major tech IPO was Google’s, which raised $1.9 billion.
“Facebook was not originally created to be a company. It was built to accomplish a social mission – to make the world more open and connected,” founder Mark Zuckerberg said in the filing.
However, this didn’t stop Facebook earning $3.7 billion in revenue in 2011, up from $1.9 billion in 2010, leaving the company with a $1 billion profit in 2011.
Zuckerberg, the company’s 27-year-old chief executive and chairman, earned $500,000 in 2011, according to the filing. Zuckerberg will also retain the most stock (28.4%) as a result of the IPO.
The filing goes on to highlight the company’s reliance on third-party app developers, namely Zynga, the maker of highly popular Facebook games such as FarmVille and Mafia Wars.
“In 2011, Zynga accounted for approximately 12% of our revenue,” Facebook said.
“If the use of Zynga games on our platform declines, if Zynga launches games on or migrates games to competing platforms, or if we fail to maintain good relations with Zynga, we may lose Zynga as a significant platform developer and our financial results may be adversely affected.”
However, the company revealed impressive statistics about its growing and active user base, which totals 845 million members, more than half of whom return to the site daily.
But the company’s stunning growth could prove difficult to sustain.
Facebook has reached a 60% penetration in the United States and the United Kingdom, and the company has warned investors to expect its expansion to slow.
“We anticipate that our active user growth rate will decline over time as the size of our active user base increases, and as we achieve higher market penetration rates,” Facebook said.
“To the extent our active user growth rate slows, our business performance will become increasingly dependent on our ability to increase levels of user engagement in current and new markets.”
The company has made a push to grow its platform and attract third-party app developers, such as Spotify, to build apps that run on Facebook.
But, the filing cautioned, “[o]ur efforts to expand the Facebook platform may result in users increasingly engaging with our platform developers’ Facebook-integrated websites instead of engaging on Facebook”.
Jan Dawson, chief telecoms analyst at technology analyst firm Ovum, says Facebook is doing very well with regard to revenue growth and profitability.
“When many web 2.0 and social networking start-ups still have a reputation for focusing exclusively on user growth, it’s reassuring that Facebook appears to have been able to convert its 845 active users into both revenue and profit,” Dawson says.
However, Dawson says the inevitable rise of Google+ will eat into Facebook’s share of the social networking market, so app developers are advised to look beyond the Facebook platform.
“Since much of Facebook’s revenue comes from gaming apps, as Google expands the gaming platform it is building with Google+, it threatens to dilute Facebook’s relationships with Zynga… and other major partners,” Dawson said.
“Ironically, mobile advertising, which is one of Google’s fastest-growing opportunities, is non-existent today for Facebook, which doesn’t display advertising on its mobile products.”