Facebook is painting itself as the David to Google's Goliath.
It's hard to imagine a company potentially valued at $100 billion playing the underdog role, but Facebook does just that in listing out a myriad potential risks that include a heavy dependence on social-gaming company Zynga, potential hackers, and possible shutdown by foreign countries. Now, many of these risks are boilerplate lines added for the sake of the S-1 prospectus. But they do provide hints to potential troubles down the road.
The company's biggest threat comes from Google, which has made no secret of its desire to go after the same users with its own Google+ network. It's increasingly shaping up to be a two-horse race, with Google making quick strides against Facebook. Despite Facebook's larger user base--845 million monthly active users--the company is mindful of Google's resources.
"Some of our current and potential competitors have significantly greater resources and better competitive positions in certain markets than we do," Facebook said in its filing, which was issued today. "These factors may allow our competitors to respond more effectively than us to new or emerging technologies and changes in market requirements."
Sure, Facebook threw out references to Microsoft and Twitter as well, but it's Google that's the legitimate threat. In both has the resources, the reach, as well as the buzz to capture the consumer's mind and money.
Facebook noted that Google could use its dominant position in various areas to deny it access to the consumer. Google could steer customers to Google+ by integrating it into its home page, search engine, or Web browser. Google's mobile platform, Android, could shut out Facebook or at least make it easier to use Google+.
Too dependent on Zynga?
Facebook's close relationship with game maker Zynga--which was built entirely on the Facebook platform and went public in December--poses a big risk for the social network. Zynga accounted for 12 percent of Facebook's revenue last year, with Facebook taking a 30 percent cut of all purchases of virtual goods made by people using Zynga games.
That reliance on Zynga has been climbing--Facebook says Zynga contributed less than 10 percent of its revenues in 2009 and 2010--and the current deal expires in 2015. At the same time, the share of revenue that comes from the payments area has grown over the past three years.
There's a reason that Zynga is mentioned in the S-1 filing 24 times--more than any other company. It's critical for CEO Mark Zuckerberg to keep good up good relations with Zynga CEO Mark Pincus. As the filing cautions, Zynga could launch games on competing platforms or migrate existing games off Facebook. A souring of their relationship could mean a significant hit to Facebook's revenue.
At the moment, of course, Facebook is the 800-pound gorilla in social networking. As a result, Zynga and all app makers want to be there. There's really no other way to reach so many people so quickly. Facebook charges app makers to use its payment infrastructure as well as to advertise across its network. Down the line, that cost may be too burdensome for some developers, who would be willing to move elsewhere and rely on their own brand recognition.
Given Facebook's dominance, it's hard to imagine that happening soon, but it's certainly possible.
Facebook's reliance on Zynga means its fortunes are tied to the popularity of its games. There's no guarantee Zynga can sustain its own growth, and there have long been concerns that player fatigue could curb growth.
A hacker culture no more
Facebook was born from a hacker mentality and the company is keenly aware of the risks it faces from malicious hackers.
As Facebook acknowledges, "computer malware, viruses, and computer hacking and phishing attacks have become more prevalent in our industry, have occurred on our systems in the past, and may occur on our systems in the future."
By sheer size alone, Facebook is a huge target. Spam and technical problems are one thing, but so is the protection of privacy. How many cases of identify theft would it take across Facebook before you decide to deactivate your account?
Facebook had to deal with a coordinated attack by the hacker group Anonymous over the weekend, although it weathered the assault with little disruption.
Hackers aren't the only threat. Facebook lists out actions by governments as another risk, noting that the site is partially or completely blocked in China, Iran, North Korea, and Syria. Facebook has proven instrumental in organizing protests and toppling governments in Egypt and Iran.
Facebook not immune to litigation
The tech world is rife with patent fights, and Facebook is another big target.
At the end of 2011, Facebook had 56 issued patents and 503 filed patent applications in the U.S., some of which it bought in exchange for shares of Facebook. It also holds 33 patents outside the U.S.--with applications for 149 more--relating to different aspects of social networks.
"We are currently, and expect to be in the future, party to patent lawsuits and other intellectual property rights claims that are expensive and time consuming, and, if resolved adversely, could have a significant impact on our business, financial condition, or results of operations," Facebook said.
Put another way, patent litigation will be a constant and expensive pain.
Facebook isn't alone in this area, of course. Patent suits have become a common tool for companies looking to derive licensing revenue or throw roadblocks in front of a competitor. Higher profile cases include Apple's ongoing battle with seemingly every Android vendor. Google, meanwhile, agreed to shell out $12.5 billion to buy itself some legal cover with Motorola Mobility's war chest of patents.
This costly issue isn't going away any time soon. But if Facebook succeeds in its IPO, at least it'll have an extra $5 billion to help it fight this battle.