Wednesday’s long-awaited filing kicks off a process that will culminate in Silicon Valley’s biggest coming-out party since the heyday of the dotcom boom and bust.
In its filing Facebook says it is seeking to raise $5 billion, but that is a figure used to calculate registration fees among others and analysts estimate it could tap investors for $10 billion.
That would value the company at $100 billion, dwarfing storied tech giants such as Hewlett Packard Co, while validating the explosive growth worldwide of social media as communication and entertainment.
Zuckerberg’s economic control of about 28 percent of the shares would be worth $28 billion at a $100 billion valuation, ranking him as the fourth-richest American.
The 27-year-old’s ownership position means Facebook, a company dissected in 2010’s Oscar-winning “The Social Network”, will not need to appoint a majority of independent directors or set up board committees to oversee compensation and other matters.
The company’s ownership structure and bylaws go against shareholder-friendly corporate governance practices put in place in the United States after years of investor activism.
As Facebook states in its prospectus, Zuckerberg will “control all matters submitted to stockholders for vote, as well as the overall management and direction of our company.”
Zuckerberg struck deals with several Facebook investors that granted him voting rights over their shares in all or most situations. Those included Yuri Milner’s DST Global, venture capital firm The Founders Fund, and entities affiliated with Technology Crossover Ventures, the IPO filing shows.
“Zuckerberg, at the time, probably had his choice of investors,” said Steven Kaplan, a professor at University of Chicago‘s Booth School of Business, who researches venture capital and corporate governance. “He basically had the ability to say ‘my way or the highway.'”
“The downside of doing this is that the value of Facebook may be slightly lower than it would be if he were not retaining control.”
Facebook could make its market debut in the middle of the year based on the usual timetable of IPOs.
Its IPO prospectus shows that Facebook generated $3.71 billion in revenue and made $1 billion in net profit last year, up 65 percent from the $606 million it made in 2010.
“We often talk about inventions like the printing press and the television,” Zuckerberg said in a letter accompanying the documents. “Today, our society has reached another tipping point.”
“The scale of the technology and infrastructure that must be built is unprecedented.”
Zuckerberg agreed to cut his compensation from $1.48 million last year to $1 effective January 1, 2013, following the example of Apple founder Steve Jobs.
Facebook’s chief operating officer and Zuckerberg’s top lieutenant, Sheryl Sandberg, earned $30.8 million in total compensation last year.
Overview of the company: http://link.reuters.com/rev36s
User growth over the years: http://link.reuters.com/mut36s
Bankers fees — how low? http://link.reuters.com/fep36s
Top 10 global IPOs: http://link.reuters.com/myn36s
Facebook’s growing popularity has pressured entrenched Internet companies from Yahoo to Google Inc. In 2011, the social network overtook Yahoo to become the top provider of online display ads in the United States by revenue, industry research firm eMarketer says.
The $5 billion figure in Wednesday’s prospectus was an initial, reference figure — a basis for registration fees, among other things — and could change based on investor demand.
The prospectus said 85 percent of Facebook’s 2011 revenue was derived from advertising. Social-gaming company Zynga, creator of Farmville, accounted for 12 percent of Facebook’s revenue last year.
Their IPOs had mixed receptions. The last debut, from Zynga, closed 5 percent below its IPO price during its first trading day in December.
Google raised just shy of $2 billion in 2004, while Groupon last year tapped $700 million and Zynga $1 billion.
THE HACKER WAY
Facebook aims to be more attractive to potential large advertisers. It has improved its ad targeting capabilities as it collects user data through new features such as the Timeline, said George John, founder of Rocket Fuel, a digital marketing company.
Advertising revenue increased 69 percent in 2011 from 2010, and its average revenue per ad increased 18 percent.
“As Facebook gathers more and more users’ time and data, it makes sense for advertisers to get more serious about allocating more budget to Facebook,” he said.
In its prospectus, Facebook revealed an effective 2011 tax rate of 41 percent and warned it could climb in 2012. That rate surpasses the average corporate rate of 35 percent and far outstrips industry peers like Apple, which through offshore businesses pay far less.
Yet in his letter to investors, Zuckerberg stressed Facebook’s “social mission” over the pursuit of profits.
“Facebook was not originally founded to be a company,” he said. “Simply put: we don’t build services to make money; we make money to build better services.”
He laid out his vision for a company that remained grounded in an engineering culture, devoting several paragraphs of his letter to what he called “The Hacker Way” at Facebook.
Some of Facebook’s most successful products – including Timeline, chat and video – emerged from “hackathons” where coders gathered to build out prototypes and compare notes, Zuckerberg wrote.
“Hackers believe that something can always be better, and that nothing is ever complete,” he said. “There’s a hacker mantra that you’ll hear a lot around Facebook offices: ‘Code wins arguments.'”
(Additional reporting by Alistair Barr, Poornima Gupta and Gerry Shih, Writing by Edwin Chan, Editing by Peter Lauria and Tiffany Wu)
How Facebook makes money could change
Diversification may mean lessening dependence on online ads
By Benjamin Pimentel, MarketWatch
SAN FRANCISCO (MarketWatch) — Facebook Inc.’s initial public offering filing paints a clearer picture of how the social networking giant makes money — though experts say that picture could change in the months and years ahead.
Facebook says it makes 85% of its revenue from advertising.
A big chunk, about 85%, comes from online advertising, pitting Facebook FB 0.00% against such industry leader Google Inc. GOOG -0.03% as well as Yahoo Inc. YHOO +1.46% and Microsoft MSFT +0.20% , which together run the Bing search engine.
But increasingly, some of Facebook’s dollars are coming from payments and fees, mainly from the cut the company gets other firm’s transaction on the site. The bulk of that flow — about 12% — currently comes from Zynga Inc ZNGA +2.46% , shares of which soared Thursday as investors realized how big a role the social gaming firm plays in Facebook’s business. Read story on Zynga’s gains.
But some analysts see Facebook pushing to find other revenue streams. One argues that it’s part of the company grand ambition to become the site where most Web users hang out — and hopefully spend their money.
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• Comb through the filing (WSJ)
• Google all over again?
• Busy IPO year led by Facebook
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• MW Topics: Facebook
“Think of Facebook City,” said analyst Tim Bajarin of Creative Strategies Inc. “Ultimately, while they would never create a walled garden, they could create a community where once you come in, you pretty much have all you need there.”
Facebook’s goal, he said, is have more users making purchases, do their banking or even making dinner reservations in the site.
“Initially, everyone just figured that he would tie advertising to everybody’s front page,” Bajarin said, referring to Facebook Chief Executive Mark Zuckerberg. “When Zuckerberg got up and started creating a platform, that’s when we began to realize that he was going beyond the traditional advertising model.”
Bajarin added that “it’s very clear that, to Zuckerberg and his team, this could be a platform for delivering applications.”
Payments and other fees made up only 1% of Facebook’s total revenue of $345 million in the March quarter of 2010, while 99% came from advertising, according to the filing with the Securities and Exchange Commission. By the end of 2011, 17% of Facebook’s revenue came from payments and fees, while 83% flowed from advertising.
A new kind of advertising
The company has spawned new kinds of online advertising, based on the interactions of Facebook’s 845 million users.
Through sponsored stories ads, a business or group can pay to highlight certain posts from a user’s friend network or other Facebook pages. Fan ads lets users to become a fan for product or brand by clicking “become a fan.”
Facebook’s ad business is a mystery
How exactly does Facebook’s ad business work? We still don’t know, Peter Kafka reports on digits.
IDC analyst Karsten Weide said advertising will probably remain Facebook’s main revenue source, saying, “The low hanging fruit is really advertising.”
And Facebook certainly has momentum in that space due largely the site’s growing attraction to brand advertisers and also small and medium-sized businesses, Weide said. In fact, Facebook overtook Yahoo in the No. 2 spot in display ad revenues in the third quarter of 2011, according to IDC data. Google was No. 1.
“It’s growing pretty fast,” Weide said. “Brand advertisers are moving a lot money into Facebook.”
And that’s mainly because of the potential that every ad will go viral through Facebook’s user networks. “That’s what they think is happening,” he said, referring to brand advertisers. “Its hot and its sexy.”
The catch, Weide said, is that the effectiveness of Facebook ads is still hard to measure. “Right now, it’s an article of faith for many brand marketers,” he added.
Finding other models
Which could be a reason why it really makes sense for Facebook to look for other revenue sources, including those beyond advertising. There’s been speculation that the company could move into the search business, a market dominated by Google.
Facebook’s conservative accounting
Facebook appears to be staying conservative in its accounting choices, after several other Internet IPOs sparked questions over how they presented their financial reports this year, Emily Chasan reports on Markets Hub.
“It would be the obvious step,” Weide said. “It would hurt Google a lot.”
Giving users the ability to more easily purchase products or services on Facebook could also open up another robust stream of revenue, said Wedbush analyst Michael Pachter.
“As soon as they give users a reason to register a credit card, we’re going to see a dramatic increase in impulse purchases,” he said.
Crawford Del Prete, also of IDC, said Facebook “has an unbelievably wide view in terms of the ways they think they can make money.” But that’s where some of the risks come in, he added.
“Between here and when those other revenue streams are a significant percentage of revenue, it could be a very unpredictable business model,” he said.
In other words, Facebook City’s viability is not assured.
“Their experimenting with trying to figure out how to engage people online beyond advertising is admirable and could be cool,” Del Prete said. “But they could spend a lot of money and, you know what, people don’t engage. Those are expensive lessons to learn.”
Still, Bajarin of Creative Strategies Inc. stressed that for now, “their platform is paying off nicely.”
“And by the way, they’re just getting started,” he added.
Chunk of Facebook profit tied to game company Zynga
By Alex Pham Physorg.com
Facebook Inc., whose initial public offering is slated to be one of the biggest debuts in U.S. stock market history, has disclosed its heavy reliance on a single customer – Zynga Inc.
In its S-1 regulatory filing Wednesday, Facebook reported that it received 12 percent of its revenue in 2011 from Zynga, whose social games such as “CityVille” and “Mafia Wars” have drawn several hundred million players to Facebook over the years. Zynga launched its own IPO in December.
With $3.7 billion in total annual revenue for Facebook, that translates to roughly $444 million in direct payments from Zynga.
That figure does not include the revenue Facebook receives from displaying advertising around Zynga’s games, which accounted for a “significant number of pages,” according to the social network’s public filing. Zynga’s games pull in 56 million players a day, according to AppData.com, a site that tracks Facebook traffic.
For Facebook, Zynga is both an asset and a potential liability: “We currently generate significant revenue as a result of our relationship with Zynga, and, if we are unable to successfully maintain this relationship, our financial results could be harmed,” the Silicon Valley social network giant wrote among its “Risk Factors.”
Facebook has reason for its unease. While Zynga’s fortunes are now tightly entwined with Facebook and the social network’s 845 million active users, the San Francisco social gaming company has made it clear that it wants to expand its games beyond Facebook. Part of the reason is that Facebook charges a 30 percent levy on the sale of all virtual goods sold via applications on its platform – including games from Zynga.
In October, Zynga unveiled a new online destination where its players can congregate outside of Facebook. It’s also pushing heavily into mobile games, both on Apple’s iOS platform and Google’s Android Marketplace.
(c)2012 the Los Angeles Times
Distributed by MCT Information Services