After Facebook IPO, Zuckerberg's hardest test awaits

Facebook is about to pull off a record-setting IPO, but Mark Zuckerberg will then need to satisfy added pressures on the company to boost its bottom line.

James Martin/CNET

The clock is about to start ticking.

When Facebook goes public later this week -- potentially commanding a lofty valuation of more than $100 billion out of the gate -- the demands on the 28-year-old Mark Zuckerberg will far outweigh any sartorial silliness about what he should or should not wear.

Not that there is any immediate pressure to perform for Wall Street given the understandable excitement about the huge number of people using Facebook every month -- a customer base now approaching some 15 percent of the world's population. But honeymoons for newly public companies only last so long. Eventually, the excitement settles, and investors start to judge a business based on how quickly the CEO taps all that potential to grow top and bottom lines.

Already, there are concerns about what happens next. Facebook suffered a slowdown in its first quarter and the company anticipates its days of hyper user growth are behind it. Simply put, there just are not a lot of Internet users left who are likely to join Facebook.

So now comes the hard part. Zuckerberg and his top technologists will now turn their attention to repairing cracks in a franchise that investors will expect to grow quickly to justify its valuation. In coming months, watch these three key areas in particular.

Boost the ad business, don't tick off users
Wall Street largely views Facebook as what it is -- a new kind of media company. For now, that's a fair assessment. More than 85 percent of its almost $4 billion in annual revenue comes from ads on Facebook -- mostly smallish, display ads that marketers target at Facebook users via the treasure trove of data that Facebook knows about all of us.

This is not a small business, but so far it's largely a volume play: The revenue has grown as Facebook has added so many millions of users at such a fast clip. That's hardly ideal, given that its user growth is slowing. In short, it needs to up how much revenue it wrings out of each user.

Facebook's ads, meantime, have come under intense scrutiny. Just today, General Motors said it will stop advertising on Facebook because, as other marketers have said, the ads just don't perform well. Other frustrated advertisers have complained that they have tried in vain to give multimillion dollar campaigns to Facebook because Facebook isn't willing to work with them to come up with new creative approaches.

Facebook: Life after the IPO

Will Facebook be able to grow fast enough to stay in Wall Street's good graces?

The challenge is to boost Facebook's ad business without irking its users. "The day you get on Facebook and there's a giant pulsating screen is the day Zuckerberg will want to die," said Jed Williams, a senior analyst with BIA Kelsey, a research firm focused on interactive media. "That's what Yahoo and AOL are for."

Facebook recently expanded so-called sponsored stories on the site so that brands can create stories that show up in a news feed of fans and their friends. Facebook also started Reach Generator with a splashy debut at New York's Natural History Museum in February, which courted big advertisers. What's more, Facebook has also created a group which is specially tasked with the outreach work on Madison Avenue to improving the company's agency relations.

But it needs more if it wants to boost its ad revenue. One possibility: Facebook creates (or buys) an ad network as a way to start serving targeted ads across the Web and outside of Facebook. The potential here is vast, given how so many sites now use Facebook Connect to let consumers log on with their Facebook credentials. This gives Facebook a wealth of data, and the bet is that it comes up with powerful way to deliver different types of ads that also incorporate activity on your social network. Maybe, for instance, the pull of a clothing store ad -- on, say, the Washington Post's site -- will have more sway when you see how many of your friends "like" it.

"Facebook's in an amazing position to use the social Web to socialize everything else," said Williams. "That's what they mean at Facebook when they talk about revolutionizing ads. ...Facebook Connect tethers Facebook across the broader Web."

Mobile madness: The more people use it, the less Facebook earns
When Zuckerberg spent $1 billion to buy Instagram , he did more than shock people with the price tag. He turned a spotlight on Facebook's mobile problem. The problem is simple to understand. Mobile is where the growth is -- it now has 488 million active monthly mobile users and climbing quickly -- and Facebook thus far isn't making money from it.

The company last week amended its S-1 filing with the SEC to underscore the challenge, and Zuckerberg reportedly told potential investors last week that mobile is his top priority for 2012. As well it should be.

As an ad play, mobile is a pain. Facebook just can't surface as many ads on a phone's screen. Facebook just rolled sponsored stories to mobile News Feeds as a way to make money from mobile users, but it's too early to tell if it will gain traction. What's more, the shift to mobile is just that -- users are going to Facebook via mobile instead of via their laptop or desktop, so Facebook is losing out where it does make money.

This bind is the biggest worry people bring up surrounding the health of the business. But slapping ads on mobile phones is just one approach. There are others, and mobile could lead to revenue streams that are less obvious.

What if, for instance, Facebook uses the power of its audience -- the social network -- and mobile to create a Groupon killer? It's entirely possible.

Facebook shuttered its Facebook Deals program last year, but then last month came back (sort of) with Facebook Offers , a way for small businesses to send promotions directly to News Feeds. That same day, Facebook also bought a startup called TagTile , which is a mobile-based customer loyalty business that offers local merchants a device for customers to tap on with their phone when they check out.

Think about these things together, and suddenly it's easy to see a way in which Facebook would want all those users coming to Facebook from their phones. The offers business isn't entirely a mobile play, but it sure helps. Facebook knows your location. Facebook knows what restaurants or retailers you like. Combine it all and your Facebook mobile app becomes your link to all sorts of local merchants, with Facebook taking a cut (and, naturally, learning more about you along the way.)

Can Facebook turn PayPal into the second coming of MySpace?
While we're on commerce, let's talk about Facebook Payment and its currency, called Facebook credits. For now, Facebook credits are used almost entirely for buying virtual goods on social games by Zynga and the like. Facebook takes a 30 percent cut of these transactions, and last year that amounted to about 15 percent of Facebook revenue, or $557 million.

That's a lot of money from a small number of people -- roughly 15 million users purchased virtual goods using Facebook Payments last year.

"Facebook has given very little promotion to credits," said Peter Vogel, whose startup, Plink, runs a Facebook credit loyalty program that lets you earn credits when you patronize Plink partners like Burger King and Dunkin' Donuts. "There's only so much Facebook can do in advertising, and the potential of Payments is so untapped right now."

Vogel is self-interested, of course. His bet is that Facebook will begin to push its virtual currency to other areas, so that people could start using them to, say, sign up with Spotify or pay to watch movies on Netflix, and then eventually into tangible products as well (something that's not currently allowed).

There have been small moves beyond games. Warner Bros., for instance, last year ran trials where Facebook users could rent movies using Facebook credits and watch them right on Facebook. And an app called Yeah TV brings streaming movies to Facebook for a piece of $5 a month, or 50 Facebook credits.

Christian Taylor sees Facebook tackling PayPal. Payvment

Another startup, called Payvment, also expects Facebook to become a central hub for millions of transactions. Payvment is doing a booming business helping merchants set up shop on Facebook and then driving traffic to your store. It has 160,000 sellers and is adding 1,500 stores a week. All told, Payvment says it powers 80 percent of all the shopping that goes on inside Facebook.

"The big elephant in the room is payments," said Christian Taylor, Payvment's founder and CEO. "They've got all these pieces connected to the whole Internet world...They just have so much opportunity to create one-click purchasing all around the Net."

Taking on PayPal involves substantial hurdles. In its S-1, Facebook spells out that "Payments on the Facebook Platform" could be deemed a "financial institution," thus subjecting the company to all sorts of regulations. On the other hand, taking on PayPal would be quite a play.

Memo to Zuck from Zuck: Keep it up
Ever since Zuckerberg, who on Monday turned 28, teamed up with Sean Parker in 2004 to turn Facebook into a venture-backed business, the two have worked hard to ensure that Zuck stayed in control. Had they not, Facebook might have ended up getting sold. Zuckerberg is keeping things stacked in his favor after the IPO as well.

For good reason, big investors hate the structure of Facebook. Zuckerberg will own 18.4 percent of the outstanding shares and control more than 57 percent of the voting rights. In short, a bet on Facebook is largely a bet on King Zuck .

He has a deep bench of talent, of course, and has surrounded himself with some of the smartest thinkers in business and technology on the planet. But if Facebook stumbles, and has its Yahoo moment, there's not a thing that shareholders can do about it -- other than drive down the price.

So far, Zuckerberg has steered his company through clumsy privacy missteps, managed to maintain stellar growth in the face of stiff competition, and proved his detractors wrong each step of the way. He'll need more than a lucky shamrock to maintain that streak.

 

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