The FaceBook Business Model: An Evolving Dilemma
It’s too early to determine whether Facebook will become a failure as a public company. Clearly, the first week of operations was a disaster, with issues ranging from Nasdaq’s technical errors on opening day to the now public lawsuits against Morgan Stanley for alleged deceitful behavior in how they allocated their knowledge of Facebook’s revised revenue and growth assessments for the future. Despite these issues, Facebook’s largest dilemma moving forward revolves around their business model.
As a public company, Facebook must now balance the immense pressure and public scrutiny to which it will now be subjected daily. Stockholders expect results, and that means continued growth and increased revenue on a quarterly basis. A disappointing opening week, however, does not spell failure. Many point to Amazon as an example; after a heavily anticipated IPO, Amazon’s stock price fell dramatically after opening. Years later, the company is an internet mogul and the opening disaster is all but forgotten; its memory survives only as an example to demonstrate that Facebook can still right their slowly leaking ship. The two companies may have disappointing IPO’s to compare with each other, but at this point, that is where the similarities end.
The main reason the stock price for Facebook has fallen so dramatically since opening is the constant need for the company to address and update their business model. The lawsuits against Morgan Stanley address an updated revenue and growth assessment for Facebook, which predicts slower growth and less revenue than the information that led to the proposed $38 IPO. For internet companies that do not manufacture or produce any products for public consumption, ad revenue is most likely the sole source of income. Facebook, of course, falls into this category. However, figuring out how to maximize ad revenue is a very difficult and tricky business. The effectiveness of an ad campaign can only be estimated with relative accuracy, making companies wary of shelling out big bucks for advertisements. This is a problem prevalent across the internet landscape, with the NY Times being a foremost example. Despite the fact that the Times features ads, it still decided to tweak their business model to increase revenue by charging a monthly fee for those who read more than a certain number of articles per month. This decision is based on the idea that dedicated readers will pay a small fee for unlimited access to the most established and respected news source. It is too early to determine if this business model will work for the Times. They are still adjusting the specifics, such as recently reducing the number of free articles per month. Yet if the New York Times believes that ad revenue is not enough to keep the publication afloat and that their readers are dedicated enough to pay for news on an otherwise free Internet, could Facebook perhaps follow the same path?
Figuring out how to maximize ad revenue is a very difficult and tricky business. The effectiveness of an ad campaign can only be estimated with relative accuracy, making companies wary of shelling out big bucks for advertisements. It is a problem prevalent across the Internet landscape, with the NY Times being a prominent example. Despite the Times front page peppered with ads from some of the largest companies in the world, the Times still decided to tweak their business model to increase revenue by charging a monthly fee for those who read more than a certain number of articles per month. The idea being that as the most established and respected news source, dedicated readers will pay a small fee to allow unlimited access. It is too early to determine if this business model will work for the Times. They are still adjusting the specifics; they have just reduced the number of free articles per month.
If the New York Times believes that ad revenue is not enough to keep the publication afloat and that their readers are dedicated enough to pay for news on an otherwise free Internet, could FaceBook perhaps follow the same path?
At first glance, the idea of charging Facebook users a fee might seem like an inherent way to turn people away from social media as a means to communicate. However, as more and more information becomes available about the profitability of their ad campaign, such an idea is perhaps not as ludicrous as one might first believe. The company is in desperate need of an ever-increasing revenue stream that must keep investors on both Wall St. and Main St. happy. The lawsuits against Morgan Stanley demonstrate that Main St. investors already feel deceived, and if their allegations bear fruit, history will bear record that they were.
Rumors of Facebook’s alleged desire to begin building their own smartphone showcase, perhaps, one of the biggest problems the Facebook business model faces: the search for another possible solution towards increased revenue growth aside from charging users. One of the main factors behind Morgan Stanley’s last minute revision to Facebook’s estimated value and future revenue growth was the increased use of smartphones to access the site. As users purchase newer and more sophisticated smartphones, laptops and desktops become more obsolete as a necessity for Facebook access. The effectiveness of ad revenue from a smartphone versus a laptop or desktop is decisively less; clearly, the effectiveness of an ad on 3.5 to 4 inch smartphone screen will be much less impressive and less likely to get interest from a Facebook user. As the smartphone market continues its almost exponential increase, it becomes a more dangerous roadblock for the current Facebook business model.
Always a step ahead of the game, Zuckerberg is readily aware of this a trend, and his reported hire of multiple ex-iphone and Apple engineers is no coincidence. The Facebook smartphone would undoubtedly integrate the Facebook platform into the phone itself, giving users more fluid access to Facebook on-the-go. Such a decision would cost Facebook hundreds of millions—if not billions—of dollars and bring it into uncharted territory in an already crowded and highly competitive smartphone market. This would be a huge risk for a company that is already warily viewed by investors after its IPO debacle. Zuckerberg and Co. will surely weigh all the options before deciding what path to take next. Investors are hoping whatever path they choose will bear low hanging fruit. Unfortunately, it doesn’t appear that the smartphone market is marked by such circumstances.