As part of the preparations for its looming IPO, Facebook has to disclose in its SEC filing some risk factors which could materially and adversely affect the company. These kinds of disclosures make for interesting reading, especially so because the destinies of tech companies can turn on a dime and change rapidly from day to day — just look at what happened to MySpace and Yahoo!.
Let’s take a closer look at some of these issues that Facebook, itself, has brought up:
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1. Revenue
Facebook may lose advertisers or technology may enforce the blocking of ads and it doesn’t advertise on its mobile app. These revenue risks are potentially huge, especially as mobile and app usage is growing at a quicker rate than desktop and normal Facebook site usage. F-Commerce hasn’t realised the kind of potential that was touted for it: Gamestop, Gap, J.C. Penney, Nordstrom, Banana Republic and Old Navy have all opened and closed their F-Commerce stores as they haven’t quite figured out how commerce fits in with the social experience of Facebook. Part of the F-Commerce drain can be attributed to the evolution of Facebook — changes to the site mean that early adopters have to be intently involved with how their store fronts look and the effort required to do that means that the returns have to be high, which they initially aren’t.
2. Zynga also accounts for 12% of Facebook’s revenue
That’s a massive reliance on a third party for a huge chunk of revenue. Zynga has been in the news on an increasing basis based on its copying of games and user acquisition tactics — not the best bedfellow.
3. The competition is going to heat up even more
Google’s “Plus” social network is growing at a phenomenal rate, backed by the growth of the Android operating system, Google favouring Plus information in its results and also integrating Plus with its existing product ecosystem. It seems Google is doing a good job with its brand pages too, something which Facebook needs to be cognisant of. Facebook also needs to take stock of the current patent wars going on. A patent war can take away a company’s focus on their core products and force them onto the defensive. Shifting from innovation to defence mode means that resources are applied to a different facet of the business which may cause it to lose users.
4. User information is becoming an increasingly hot corporate potato
Face it, if you’re a company that is taking in any kind of user information you’re bound to encounter some privacy scrutiny. Facebook’s data stratosphere causes great unease in the privacy masses and because Facebook is free, it straddles the line between offering a great social service and having to monetise that — which involves the usage of user data for revenue purposes. Not having the right measures in place to secure that data could spell disaster for an entity like Facebook. It’s the textbook case study that CEO’s learn in their public relations training: what to do if there’s a data breach; and rightly so.
5. Zuckerberg is still the majority shareholder
If Facebook contracts Apple-syndrome (the founder dies) there might not be a Tim Cook to fall back on. Sheryl Sandberg, Facebook’s best paid employee, can certainly take over from an operations point of view, but one feels the vision would die if Zuck did. It also means that if Zuckerberg goes insane or loses his mental capacity, then Facebook could be in serious trouble as he has control over the majority of the shares and has the biggest voice when it comes to decision time.
By no means do these factors make Facebook a bad stock to buy, but they do indicate that one of the biggest potential tech IPO’s in history is susceptible to the tremors that abound within the valley.
