Facebook IPO Poses Questions for Broadcasters

Company's efforts to justify $100 billion-plus market cap could pose long-term competitive issues
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In a development that could have an important long-term impact on the online video, mobile and TV landscape, Facebook wrapped up the third biggest IPO in history Friday, with its share price opening with an 11% pop from the $38 IPO price and then settling back to $38.37 at close. That would value the company at over $100 billion.

The lack of movement in the share price during the first day trading, which was the heaviest of any IPO in history with more than 460 million shares changing hands, indicated that the IPO was priced in line with market demand. But it also highlights the challenges the company faced as its works to justify the hoopla over its IPO with strong revenue growth in upcoming years.

Those efforts will be important both competitively for the TV industry, which will increasingly compete directly with Facebook for online and mobile ad revenues, and as a partner in the TV industry's effort to promote programs and content via social media.

If Facebook is able to significantly expand its ad take, as many investors seem to expect, then broadcasters and programmers could find themselves increasingly competing with the social media giant, much as they do with Google, which dominates online advertising.

On the other hand, a successful effort by Facebook to expand social media and mobile advertising and establish better business models for those media could be extremely helpful for broadcasters looking to build up their mobile and social TV efforts, which have not yet produced much of a return on their investments.

The scale of Facebook's success in the social media space was captured this week in data released by Nielsen. In a blog posted May 17, Nielsen noted that Facebook had about 152 million unique visitors in the U.S. in March 2012, which meant that two out of every three Americans who were active online visited the social media site during the month.

The site also had significant traffic in Brazil (38.1 million uniques), France (28.3 million), the U.K. (25.7 million), Germany (24.5 million) and Italy (21.3 million), Nielsen reported. In each of these markets, the site attracted over half of those active online, and in a number of them, more than two-thirds of the active online users visited the site. In Brazil, for example, 76.7% of active online users visited Facebook.

How successful Facebook will be in turning that success into revenue that would justify its market cap is open to question. To maintain its growth, it will have to continue to expand the very nascent social media advertising business, which Zenith Media projects will hit $3.4 billion in 2012 and grow to $6.2 billion in 2014.

It will need to find a way to turn the burgeoning mobile market in cash.

MagnaGlobal predicts that there will be some 68.4 million tablets in U.S. homes by the end of 2012 and some 157.7 million smartphone subscriptions by year end. That has helped make social media one of the most popular applications on mobile devices.

Yet, overall mobile TV advertising remains tiny -- only $783 million in 2011 rising to about $1.16 billion in 2012 and  2.6 billion in 2014, according to Zenith Media. Currently, Facebook gets almost no revenue from mobile.

Brian Wieser, senior research analyst at the Pivotal Research Group, has predicted Facebook will "successfully establish itself as a player in online video with $764 million in ad revenue in the U.S. alone by 2017, with 17% of the market, up from zero today, as well as mobile with $490 million in ad revenue in the U.S. by 2017, about 22% of the non-search mobile market at that time. Global figures will likely be double these totals."

Wieser has also predicted that total ad revenues at Facebook will "hit $12.6 billion (or 70% of total revenue) by 2017, representing a 25% compound growth rate."

While he remains "optimistic on the company's underlying business opportunity," he also put a sell rating on the stock based on the $38 IPO price and cited a number of risks.

These include heft competition from companies like Google, the need to convince advertisers of their effectiveness of its social media advertising products, and the large capital expenditures, which are likely to approach $2 billion, in 2012 needed to maintain its competitive position and expand its operations.

"Facebook will perpetually be in an 'arms race' with Google and others, and it is likely they will need to make additional large acquisitions in the future with little or no associated revenue," he noted in a research report issued Friday.

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