Facebook's log-on screen. (Reuters)
SAN FRANCISCO (Reuters) -
Facebook unveiled plans for the biggest ever Internet IPO that could raise as much as $10 billion, but made it clear CEO
Mark Zuckerberg will exercise almost complete control over the company, leaving investors with little say.
The Harvard dropout, who launched the social networking phenomenon from
his dorm room, will control 56.9 percent of the voting shares in a
company expected to be valued at up to $100 billion when it goes public.
Facebook says it has 845 million active monthly users.
Wednesday's long-awaited filing kicks off a process that will culminate
in Silicon Valley's biggest coming-out party since the heyday of the
dotcom boom and bust.
In its filing Facebook says it is seeking to raise $5 billion, but that
is a figure used to calculate registration fees among others and
analysts estimate it could tap investors for $10 billion.
That would value the company at $100 billion, dwarfing storied tech
giants such as
Hewlett Packard Co, while validating the explosive growth
worldwide of social media as communication and entertainment.
Zuckerberg's economic control of about 28 percent of the shares would
be worth $28 billion at a $100 billion valuation, ranking him as the
fourth-richest American.
The 27-year-old's ownership position means Facebook, a company
dissected in 2010's Oscar-winning "The Social Network", will not need to
appoint a majority of independent directors or set up board committees
to oversee compensation and other matters.
The company's ownership structure and bylaws go against
shareholder-friendly corporate governance practices put in place in the
United States after years of investor activism.
As Facebook states in its prospectus, Zuckerberg will "control all
matters submitted to stockholders for vote, as well as the overall
management and direction of our company."
Zuckerberg struck deals with several Facebook investors that granted
him voting rights over their shares in all or most situations. Those
included Yuri Milner's DST Global, venture capital firm The Founders
Fund, and entities affiliated with Technology Crossover Ventures, the
IPO filing shows.
Google Inc's
Sergey Brin and
Larry Page retained control of the search giant through similar arrangements and the Sulzbergers did much the same at the
New York Times.
"Zuckerberg, at the time, probably had his choice of investors," said Steven Kaplan, a professor at
University of Chicago's
Booth School of Business, who researches venture capital and corporate
governance. "He basically had the ability to say 'my way or the
highway.'"
"The downside of doing this is that the value of Facebook may be
slightly lower than it would be if he were not retaining control."
Facebook could make its market debut in the middle of the year based on the usual timetable of
IPOs.
Its IPO prospectus shows that Facebook generated $3.71 billion in
revenue and made $1 billion in net profit last year, up 65 percent from
the $606 million it made in 2010.
"We often talk about inventions like the printing press and the
television," Zuckerberg said in a letter accompanying the documents.
"Today, our society has reached another tipping point."
"The scale of the technology and infrastructure that must be built is unprecedented."
Facebook appointed
Morgan Stanley,
Goldman Sachs and
JPMorgan as its lead underwriters. Other bookrunners include
Bank of America Merrill Lynch, Barclays Capital and Allen & Co.
Zuckerberg agreed to cut his compensation from $1.48 million last year
to $1 effective January 1, 2013, following the example of Apple founder
Steve Jobs.
Facebook's chief operating officer and Zuckerberg's top lieutenant,
Sheryl Sandberg, earned $30.8 million in total compensation last year.
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Overview of the company: http://link.reuters.com/rev36s
User growth over the years: http://link.reuters.com/mut36s
Bankers fees -- how low? http://link.reuters.com/fep36s
Top 10 global IPOs: http://link.reuters.com/myn36s
The
Zynga factor: http://link.reuters.com/paf65s
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
DOTCOM MANIA?
Facebook's growing popularity has pressured entrenched Internet
companies from Yahoo to Google Inc. In 2011, the social network overtook
Yahoo to become the top provider of online display ads in the United
States by revenue, industry research firm eMarketer says.
A $10 billion IPO would be the fourth-largest in U.S. history after Visa Inc,
General Motors, and AT&T Wireless,
Thomson Reuters data shows.
The $5 billion figure in Wednesday's prospectus was an initial,
reference figure -- a basis for registration fees, among other things --
and could change based on investor demand.
The prospectus said 85 percent of Facebook's 2011 revenue was derived
from advertising. Social-gaming company Zynga, creator of Farmville,
accounted for 12 percent of Facebook's revenue last year.
The IPO will dwarf any recent debuts of Internet companies, such as Zynga,
LinkedIn Corp,
Groupon Inc and
Pandora Media Inc.
Their IPOs had mixed receptions. The last debut, from Zynga, closed 5
percent below its IPO price during its first trading day in December.
Google raised just shy of $2 billion in 2004, while Groupon last year tapped $700 million and Zynga $1 billion.
THE HACKER WAY
Facebook aims to be more attractive to potential large advertisers. It
has improved its ad targeting capabilities as it collects user data
through new features such as the Timeline, said George John, founder of
Rocket Fuel, a digital marketing company.
Advertising revenue increased 69 percent in 2011 from 2010, and its average revenue per ad increased 18 percent.
"As Facebook gathers more and more users' time and data, it makes sense
for advertisers to get more serious about allocating more budget to
Facebook," he said.
In its prospectus, Facebook revealed an effective 2011 tax rate of 41
percent and warned it could climb in 2012. That rate surpasses the
average corporate rate of 35 percent and far outstrips industry peers
like Apple, which through offshore businesses pay far less.
Yet in his letter to investors, Zuckerberg stressed Facebook's "social mission" over the pursuit of profits.
"Facebook was not originally founded to be a company," he said. "Simply
put: we don't build services to make money; we make money to build
better services."
He laid out his vision for a company that remained grounded in an
engineering culture, devoting several paragraphs of his letter to what
he called "The Hacker Way" at Facebook.
Some of Facebook's most successful products - including Timeline, chat
and video - emerged from "hackathons" where coders gathered to build out
prototypes and compare notes, Zuckerberg wrote.
"Hackers believe that something can always be better, and that nothing
is ever complete," he said. "There's a hacker mantra that you'll hear a
lot around Facebook offices: 'Code wins arguments.'"
(Additional reporting by Alistair Barr, Poornima Gupta and Gerry Shih,
Writing by Edwin Chan, Editing by Peter Lauria and Tiffany Wu)
How Facebook makes money could change
Diversification may mean lessening dependence on online ads
By Benjamin Pimentel, MarketWatch
SAN FRANCISCO (MarketWatch) — Facebook Inc.’s initial public offering
filing paints a clearer picture of how the social networking giant makes
money — though experts say that picture could change in the months and
years ahead.
Reuters
Facebook says it makes 85% of its revenue from advertising.
A big chunk, about 85%, comes from online advertising, pitting Facebook
FB 0.00% against such industry leader Google Inc.
GOOG -0.03% as well as Yahoo Inc.
YHOO +1.46% and Microsoft
MSFT +0.20% , which together run the Bing search engine.
But
increasingly, some of Facebook’s dollars are coming from payments and
fees, mainly from the cut the company gets other firm’s transaction on
the site. The bulk of that flow — about 12% — currently comes from Zynga
Inc
ZNGA +2.46% , shares of which soared Thursday as investors realized how big a role the social gaming firm plays in Facebook’s business.
Read story on Zynga's gains.
But some analysts see Facebook pushing to find other revenue streams.
One argues that it’s part of the company grand ambition to become the
site where most Web users hang out — and hopefully spend their money.
“Think of Facebook City,” said analyst Tim Bajarin of Creative
Strategies Inc. “Ultimately, while they would never create a walled
garden, they could create a community where once you come in, you pretty
much have all you need there.”
Facebook’s goal, he said, is have more users making purchases, do their banking or even making dinner reservations in the site.
“Initially, everyone just figured that he would tie advertising to
everybody’s front page,” Bajarin said, referring to Facebook Chief
Executive Mark Zuckerberg. “When Zuckerberg got up and started creating a
platform, that’s when we began to realize that he was going beyond the
traditional advertising model.”
Bajarin added that “it’s very clear that, to Zuckerberg and his team, this could be a platform for delivering applications.”
Payments and other fees made up only 1% of Facebook’s total revenue of
$345 million in the March quarter of 2010, while 99% came from
advertising, according to the filing with the Securities and Exchange
Commission. By the end of 2011, 17% of Facebook’s revenue came from
payments and fees, while 83% flowed from advertising.
A new kind of advertising
The company has spawned new kinds of online advertising, based on the interactions of Facebook’s 845 million users.
Through sponsored stories ads, a business or group can pay to highlight
certain posts from a user’s friend network or other Facebook pages. Fan
ads lets users to become a fan for product or brand by clicking “become a
fan.”
Facebook's ad business is a mystery
How exactly does Facebook's ad business work? We still don't know, Peter Kafka reports on digits.
IDC
analyst Karsten Weide said advertising will probably remain Facebook’s
main revenue source, saying, “The low hanging fruit is really
advertising.”
And Facebook certainly has momentum in that
space due largely the site’s growing attraction to brand advertisers and
also small and medium-sized businesses, Weide said. In fact, Facebook
overtook Yahoo in the No. 2 spot in display ad revenues in the third
quarter of 2011, according to IDC data. Google was No. 1.
“It’s growing pretty fast,” Weide said. “Brand advertisers are moving a lot money into Facebook.”
And
that’s mainly because of the potential that every ad will go viral
through Facebook’s user networks. “That’s what they think is happening,”
he said, referring to brand advertisers. “Its hot and its sexy.”
The
catch, Weide said, is that the effectiveness of Facebook ads is still
hard to measure. “Right now, it’s an article of faith for many brand
marketers,” he added.
Finding other models
Which
could be a reason why it really makes sense for Facebook to look for
other revenue sources, including those beyond advertising. There’s been
speculation that the company could move into the search business, a
market dominated by Google.
Facebook’s conservative accounting
Facebook
appears to be staying conservative in its accounting choices, after
several other Internet IPOs sparked questions over how they presented
their financial reports this year, Emily Chasan reports on Markets Hub.
“It would be the obvious step,” Weide said. “It would hurt Google a lot.”
Giving
users the ability to more easily purchase products or services on
Facebook could also open up another robust stream of revenue, said
Wedbush analyst Michael Pachter.
“As soon as they give users
a reason to register a credit card, we’re going to see a dramatic
increase in impulse purchases,” he said.
Crawford Del Prete,
also of IDC, said Facebook “has an unbelievably wide view in terms of
the ways they think they can make money.” But that’s where some of the
risks come in, he added.
“Between here and when those other
revenue streams are a significant percentage of revenue, it could be a
very unpredictable business model,” he said.
In other words, Facebook City’s viability is not assured.
“Their
experimenting with trying to figure out how to engage people online
beyond advertising is admirable and could be cool,” Del Prete said. “But
they could spend a lot of money and, you know what, people don’t
engage. Those are expensive lessons to learn.”
Still, Bajarin of Creative Strategies Inc. stressed that for now, “their platform is paying off nicely.”
“And by the way, they’re just getting started,” he added.
Benjamin Pimentel is a MarketWatch reporter based in San Francisco.
Chunk of Facebook profit tied to game company Zynga
By Alex Pham Physorg.com
Facebook Inc., whose initial public offering is slated to
be one of the biggest debuts in U.S. stock market history, has disclosed
its heavy reliance on a single customer - Zynga Inc.
In its S-1 regulatory filing Wednesday,
Facebook reported that it received 12 percent of its revenue in 2011 from Zynga, whose social games such as "
CityVille"
and "Mafia Wars" have drawn several hundred million players to Facebook
over the years. Zynga launched its own IPO in December.
With $3.7 billion in total annual revenue for Facebook, that
translates to roughly $444 million in direct payments from Zynga.
That figure does not include the revenue Facebook receives from
displaying advertising around Zynga's games, which accounted for a
"significant number of pages," according to the social network's public
filing. Zynga's games pull in 56 million players a day, according to
AppData.com, a site that tracks Facebook traffic.
For Facebook, Zynga is both an asset and a potential liability:
"We currently generate significant revenue as a result of our
relationship with Zynga, and, if we are unable to successfully maintain
this relationship, our financial results could be harmed," the
Silicon Valley social network giant wrote among its "Risk Factors."
Facebook has reason for its unease. While Zynga's fortunes are
now tightly entwined with Facebook and the social network's 845 million
active users, the San Francisco
social gaming
company has made it clear that it wants to expand its games beyond
Facebook. Part of the reason is that Facebook charges a 30 percent levy
on the sale of all virtual goods sold via applications on its platform -
including games from Zynga.
In October, Zynga unveiled a new online destination where its
players can congregate outside of Facebook. It's also pushing heavily
into mobile games, both on Apple's iOS platform and Google's Android
Marketplace.
(c)2012 the Los Angeles Times
Distributed by MCT Information Services
Newscribe : get free news in real time
Related post:
Facebook founder Mark Zuckerberg "Likes" Chan and Weds 1 day after IPO
