Facebook 's IPO is the biggest in the US tech space since Google went public in August 2004. With an offering of USD85 per share, the search giant raised USD1.67bn, giving it a valuation of more than USD23bn, a figure that was hugely impressive at the time. But it pales in comparison to Facebook’s public offering, which saw the firm sell 421m shares at USD38 each, raising USD16bn at a valuation of more than USD104bn. Clearly, Google had a more modest public valuation than Facebook, but how do the two compare in terms of their performance pre-IPO and what does Facebook need to do to emulate the success of its rival?
1. FACEBOOK VERSUS GOOGLE POST IPO
Looking at the two IPOs from a profitability standpoint, Facebook is ahead. In the 12 months before it went public, Facebook earned USD4.04bn in revenue, with net income coming in at USD974m, giving the firm a profit margin of almost 25%. In comparison, Google had net income of USD190m on revenues of USD2.26bn, a profit margin of just 8.4%. But Google was growing much faster than Facebook when it went public, with revenues up 162% and 125% year on year in its two quarters before going public. Facebook, on the other hand, has seen growth slow to 55% and 45% year on year in its two final quarters before the IPO.
From a metrics standpoint, Facebook actually has a stronger business than Google at IPO. But what sets Google out is its performance since its IPO. In many respects the Google IPO undervalued the search giant, which has gone on to record itsfirst USD10bn revenue quarter and is now worth close to USD200bn. Through 2004, the firm's revenues more than doubled every quarter, and percentage increases remained in the 90s and 80s in 2005. Even in its latest quarter revenues were up 29% yearly. Facebook's investors are beginning to realise how hard it will be for the social network to live up to its huge vale at IPO, with shares in the company falling below the list price in just its second day of trading. So what must Facebook do if it is to rival Google in the long run?
Both Facebook and Google make the majority of their revenues from advertising, but Google is actually more reliant on this stream than Facebook. At IPO, advertising accounted for 97.8% of Google's total business, and it has remained relatively constant despite Google's efforts to broaden its revenue streams. At Facebook that number was 83.9% in its latest quarter, with the social network actually reducing its reliance on advertising as its virtual goods business continues to grow. And Facebook's business model is arguably more mature, with a little less than half of its revenues coming from outside the US, while just a quarter of Google's revenues came from international markets when it went public.
Facebook is already the biggest online display ad publisher globally, but social media advertising is an area where brands have very little experience and where ROI is hard to prove. On Google the payoff is obvious, people come to the site to look for information and the advertising is seen as an extension of that. Facebook needs to do the same thing, or brands will begin to look elsewhere. The social network has already seen General Motors pull back from advertising on the platform, not because Facebook advertising doesn't work, but because brands still don't know what to expect. Facebook will need to manage these expectations and explain that the social network is for brand-building and awareness. Google's business also works because it has ad products that can be used on any site. Facebook doesn't offer this yet. But it should.
Facebook is hugely dominant in social, with some of the most engaged users of any site on the web. It has 900m members, 525m of whom access the site almost every day. In the US, the average user spends seven hours and 45 minutes on Facebook a month. For Google that figure is less than two hours. Facebook also has huge amounts of information on each user's online network of friends, their personal data and their likes and dislikes, from music to films to which news sites they read.
Google does understand the value of social, with its Google+ network its latest attempt to beat Facebook at its own game. The move to integrate social across all its properties is a necessary one. But it will struggle to compete with Facebook simply because its users have already invested so much time into the social network. Much like Microsoft cannot break the Google habit in search, Google will struggle to break the Facebook habit in social.
While Google is increasingly focusing on social, Facebook is making moves into Google's core business, search. The firm is increasingly positioning itself as a content discovery platform through its partnerships with music, video and publishing sites. It also has a deal in place with Microsoft to use its public data to make results more relevant and personal to each user and is integrating Microsoft search results into the search function on its own site. While Google looks set to remain the dominant search portal for the foreseeable future, there are certain situations, especially when users are hunting for local restaurants or bars and need recommendations, when Facebook could prove more useful. And that will eat into Google's revenues.
As consumers switch from the desktop to accessing the web via smartphones and tablets Google and Facebook need to ensure they can translate online popularity to mobile success. Both firms are already focusing on this, with Google controlling the most popular mobile OS globally in Android and Facebook owning one of the most popular apps. The two are also hugely active in making mobile acquisitions, with Facebook making its fifth mobile acquisition this year, buying social gifting service Karma on the day it went public.
But neither firm has figured out how to monetise mobile. Facebook has already already highlighted mobile as a risk, with half its users accessing the site from mobile devices, but the social network yet to generate revenues from that usage. And despite having Android, Google continues to make relatively little money from mobile. For now, both firms are concentrating on ensuring that consumers use their mobile sites rather than rivals', but mobile will be the next big battleground.
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