Tuesday, May 22, 2012

The Facebook Bubble Slowly Deflating

Facebook's IPO has been disappointing. Shares went public on Friday with an initial IPO price of $38 per share, briefly climbing to $45, then slowly deflating.

The Telegraph reported yesterday (Monday):
Shares in the Californian company fell by 10pc within minutes of the opening of trading on Monday on the Nasdaq stock exchange in New York, and lost as much as 13.7pc to $33 (£21).

By contrast, Apple shares climbed 1.5pc to $538 today.

Today's decline follows Friday's debut in which the shares finished just 0.6pc higher at $38.23, failing to live up to expectations that they would enjoy a sharp rise.

Facebook's flotation reaped $16bn for the company and some of its early investors as the social networking site sold more than 400m shares at the top of the range set out by its bankers.

However, analysts say that aggressive pricing is likely to have left little in the way of investor appetite for a company that made just $205m of profits in the first quarter of the year.
Then, this morning, word came out that Facebook's lead underwriter, Morgan Stanley, had slashed estimates of Facebook's profits. From Fox News:
Shares of Facebook (FB: 31.00, -3.03, -8.90%) took another tumble on Tuesday as word spread that the company’s lead underwriter slashed its revenue target during the social-networking heavyweight's IPO road show.

The latest slide gives further fuel to critics who believed Facebook’s initial public offering overvalued -- and overhyped -- the company.

According to Reuters, lead underwriter Morgan Stanley’s (MS: 13.31, +0.12, +0.91%) consumer Internet analyst told major clients he was reducing his second quarter and 2012 revenue forecasts during the run-up to Facebook’s $16 billion IPO.

Two investors who were advised of the new forecast from Scott Devitt told Reuters they were shocked by the disclosure and say it may have helped contribute to the stock’s 10% plunge on Monday. Typically lead investment banks paint rosy pictures about the companies they are bringing public.

"This was done during the roadshow -- I've never seen that before in 10 years," a mutual-fund source who was called by Morgan Stanley told the wire service.

Shares of Facebook were recently off 6.35% to $31.84 and tumbled as low as $30.98 -- 18.5% below the company’s $38-a-share IPO price. Even during the Friday trading debut, Facebook's underwriters had to step in to prevent the shares from breaking issue.

Facebook’s highly-anticipated IPO valued the company at a whopping $104 billion -- roughly the same size as Internet veteran (AMZN: 215.33, -2.78, -1.27%) -- despite serious questions about the its ability to lure advertisers and monetize its mobile offerings.

* * *

The Morgan Stanley revenue revision came on the heels of Facebook filing an amended prospectus with the Securities and Exchange Commission that expressed caution about revenue growth due to a shift to mobile by users, Reuters reported.
Shares of Facebook continued to slide Tuesday, even as the broader market managed a modest gain, as fallout from the company's IPO last week continued.

The social network’s share price was lately down 3 percent, adding to a decline of 11 percent seen in Monday's session. Facebook is now down 27 percent from Friday's intra-day high of $45 a share. ...

Facebook's market debut on Friday was beset by problems, so much so that Nasdaq said on Monday it was changing its IPO procedures. That may comfort companies considering a listing, but it does little for Facebook, whose lead underwriter Morgan Stanley had to step in and defend the $38 offering price on the open market.

Facebook, its investment bankers and the Nasdaq market have come under fire for not making sure one of the most anticipated market offerings in recent memory happened smoothly.

When a stock falls below its offer price so soon after an IPO it is considered a disappointment for the company, particularly when the IPO is the most heavily traded ever and concerns such a high profile company.

A number of reasons for the stock decline have been offered by observers. Some pointed to underwriters offering too many shares, while others blamed an overly strong IPO price and worries about slowing revenue growth at the social network.

Also, Reuters reports that Facebook’s lead underwriters -- Morgan Stanley, JPMorgan and Goldman Sachs -- cut their revenue forecasts for the company in the run-up to the company’s $16 billion IPO.
Actually, the decline is not that great of mystery--the company has been over-hyped. It is heading to the same place My Space has gone.

In June of 2011, the Guardian ran a story suggesting that the popularity of Facebook had peaked. It noted:
The number of people using Facebook has dropped in the UK for the second month in a row, mirroring similar falls in the US, Canada and Norway, giving the first signs that the social network's popularity may be waning in the west.

The website continued to grow worldwide, hitting an all-time high of 687 million users, according to data from the tracking company Inside Facebook, which uses Facebook's own advertising tools to determine the number of people using the site every month. Growth slowed however, having risen by 13.9m accounts in April and then just 11.8m in May. Typically in the past year it has grown by 20m a month. That slowdown could thwart founder Mark Zuckerberg's ambition to reach 1 billion users worldwide, despite his prediction last June that "it is almost a guarantee that it will happen".

Growth in Facebook use seems to peak in any country once the site is used by roughly half of those who have internet connections – though with more than 2 billion people online worldwide, the site could still reach the 1 billion figure. However, it would need people who have joined the site to stay with it – and that hasn't been happening in some countries.

Magnus Hoglund, chief executive of the law media portal, who has worked on digital media companies for the past decade, said: "From my experience, I get the sense that being on Facebook is not cool anymore. The early adopters and trend setters are moving away. [But] these are also exactly the type of people brand advertisers want to reach; if they are leaving, it doesn't look good for Facebook."
This article from Periscope Post from last June also noted the decline in membership in the U.S., and suggested that Facebook had reached its saturation point.

More recently, in February of this year, the Next Web reported:
Although the report says that the number of visits to Facebook continues to grow across all platforms, the world’s largest social network has reached saturation point among active Internet users in more markets, with significant user-growth restricted to emerging markets such as India, Indonesia and Brazil.

More importantly across the three waves of research in 2011, Facebook users globally have reduced the frequency of key Facebook activities including sending digital presents, searching for new contacts or sending message to friends.

The latest data shows Facebook Fatigue is spreading in the US from the early adopters who it identified as “disengaging” in the GWI.5 report. Declines in social networking activity such as messaging friends fell 12% over the six waves of research, searching for new contacts fell 17% and joining a group 19% among all Facebook users in the US.
The same article suggested that trends showed that, rather than moving toward a universal "Internet culture," markets were fragmenting and showing preferences for local social networks and products.

I think there are several issues underlying Facebook's peaking popularity, some of it the fault of Facebook.

First, Facebook is no longer new and cool. Just as people migrated from My Space because it became overwhelmed by younger kids, Facebook has become oversaturated. It's no longer cutting edge. Moms and dads use it. Businesses advertise on it. It is mundane.

Second, it has increasing competition not only from Twitter, but, as alluded to in the articles above, from other similar social networking products in countries such as China, Russia, and Brazil.

Third, it's no longer enjoyable. I stopped using Facebook when I started being inundated with updates on every little action or activity my Facebook "friends" experienced in their Facebook games. I understand that I could shut off the feed, but that isn't the point--I should never have had to put up with those updates in the first place.

Finally, and related to the last item, Facebook became unfriendly to its members, screwing around with the privacy policies, trolling for information to support adds, and became a liability to more and more people. As this op-ed from January this year notes:
The way Facebook is structured now, you feel like if you don't dip your toes into the social network's stream of information for a second here, a minute there, you will miss out. The dashboard, once a study in relative simplicity, vaguely resembles a busy screen from World of Warcraft. The News Feed breaks up updates by Top and Recent Stories, a distinction I've never needed. And the live ticker chronicles the minute moves of friends as they happen, which sounds great in theory, but is more a visual distraction in practice.

Privacy wasn't an issue (for me) until lately. Facebook's charm once lay in the feeling of exclusivity it projected, a closed off virtual playground open only to a smallish group of friends where I could communicate without second thought. Now when I do so, I edit myself. To some extent, my profile and updates are visible to extended family, colleagues, professional connections, and a large number of others, so I post rather benign messages, images and links aimed at the largest common denominator. Sure, I could create different groups of Facebook friends and select who can and can't see my updates, but organizing and maintaining those groups is too much work.

Ever-increasing Facebook partnerships means I need to be careful about the content I consume. Because I naively clicked on an online Washington Post story a Facebook friend read, all the stories I read from that outlet are automatically broadcast. With other apps like Spotify, Facebook integration is mandatory, meaning half the time, I enter a "Private Session" so others can't see which songs I'm listening to. And while I get that targeted advertising can be a win-win for marketers and consumers, I don't know whether to be amused or uncomfortable with recurring "Sponsored Stories" like this one. (For the record, Facebook, I neither like guys with tattoos nor cedar enzyme baths.)

Facebook has also given rise to user etiquette unique to the social network -- and not all of it's good. The same way behavior in the movie theater has gone downhill -- cell phones ringing, people chattering mid-scene -- I'm noticing some users becoming less polite. People bug me if I don't "Like" something they put up. ("Dude, 'Like' it!") Others expect me to know what they've been up to because we're Facebook friends. (Well, you saw on Facebook... right?") And because Facebook nurses our propensity for immediate gratification, we expect things to happen even more quickly there than in real life. Wrote one friend un-ironically on another's wall: "Why haven't you poked me back yet? It's been 20 minutes!"

That may be why several current and former users I've spoken with continue to steer clear of Facebook, deactivate their accounts, or ratchet down their usage. The evolving Facebook experience has either turned them off or the social network increasingly drew them away from the real world, breeding a false sense of intimacy where following friends and family on Facebook displaced deeper, quality interactions with them.
To sum up, this article, published on May 15 this year, reported:
Half of Americans think Facebook is a passing fad, according to the results of a new Associated Press-CNBC poll. And, in the run-up to the social network’s initial public offering of stock, half of Americans also say the social network’s expected asking price is too high.

* * *

The privacy issue is a stinger. Three of every five Facebook users say they have little or no faith that the company will protect their personal information. Only 13 per cent trust Facebook to guard their data, and only 12 per cent would feel safe making purchases through the site. Even Facebook’s most dedicated users are wary — half of those who use the site daily say they wouldn’t feel safe buying things on the network.

As for how Facebook makes most of its money — selling ads — 57 per cent of users say they never click on them or on Facebook’s sponsored content. About another quarter say they rarely do.

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