Facebook files for IPO: Five of the network’s biggest risks

Facebook’s prospectus for its $100 billion float has revealed that its finances are better than most commentators thought, but it has also show that there’s still plenty that could go wrong.

After all, Facebook isn’t the only social network to have dominated the industry, and as it points out within the document itself, there are plenty of risks that could topple the company just as it could continue success for several more years.

Facebook may be flying high right now with $US3.7 billion in revenue and a tidy $US1 billion profit, but there are plenty of risks to watch out for.

Let’s take a look at five of the biggest:

The development platform loses its cool

Facebook said in its release that Zynga made up 12% of the company’s revenue in 2011. That’s hundreds of millions of dollars coming from just one source, and is reason to celebrate as the company expands beyond just advertising.

But this is a sizeable risk as well. Zynga is its own entity – it even listed on the NASDAQ last year – and it would be foolish to think there aren’t risks that could stop the company from performing.

In fact, analysts have a number of concerns about Zynga. It only passed its initial IPO share price for the first time in the past week.

Apps are great for Facebook and this platform is a great boon for Facebook, but with Zynga such a large part of the revenue source the company is leaving itself open to hurting if the FarmVille maker goes under.

In fact, the company even points out that if the Facebook Platform expands and this interferes with developers’ integrated websites and apps, it could hurt revenue.

“If the use of Zynga games on our platform declines…we may lose Zynga as a significant platform developer.”

Mobile is growing – but where are the ads?

One of the more interesting statistics contained in the IPO was that Facebook now has 843 million active users every month. It’s an incredible number, but what’s even more incredible is that about half of all that activity is now being seen on mobile devices, including iPhones and iPads.

Sounds great, as Facebook has a number of mobile solutions. The problem? The lack of advertising on its mobile platform.

This is a huge issue for the company as advertising remains its bread and butter. The lack of apps on mobile devices is only going to become a stronger issue as mobiles become more popular.

“We do  ot currently generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven,” the company said in its filing.

“Accordingly, if users continue to increasingly access Facebook mobile products as a substitute for access….our revenue and financial results may be negatively affected.”

Investors look for faster growth

Facebook has been growing steadily, even as its reach becomes larger. Over the past year it saw active daily users grow 48% to 483 million. But as it points out in the filing, it actually expects growth rates to decline.

“Our use growth and revenue growth rates will inevitably slow as we achieve higher market penetration rates, as our revenue increases to higher levels, and as we experience increased competition.”

This isn’t so much a problem of substance as it is of perception. Investors are always looking for the next big thing, and Facebook may lumber along too slowly for some. Such a situation would become ripe for competitors.

One lawsuit away from dead

This is a huge one. With all the legal problems Facebook has taken on in the past, it’s not necessarily encouraging to see the company say that a class-action could take it down.

And yet, that’s exactly what it’s saying.

Because the company has hundreds of millions of users, the plaintiffs in such a case usually demand “enormous monetary damages”. That’s a problem.

“Any litigation to which we are a party may result in an onerous or unfavourable judgment…any such negative outcome could result in payments of substantial monetary damages or fines, or changes to our products or business practices”.

Facebook has had plenty of run-ins with the law before, and is extremely wary. It knows the users hold all the power, and one step wrong could ruin everything that it’s built.

Mark Zuckerberg holds all the power

It happened with Steve Jobs too. There was so much discussion over whether Apple could survive when Jobs passed away – now it looks like Facebook wants to avoid that mistake.

In a list of risks within the company’s prospectus, it states that Zuckerberg has control over the majority of voting, or Class B, stock, and that he may still hold onto this stock when he dies.

“In the event that Mr Zuckerberg controls our company at the time of his death, control may be transferred to a person or entity that he designates as his successor.”

“Mr Zuckerberg has the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of our assets.”

Facebook remains Zuckerberg’s company. He intends to take it to the next level, but that could be a problem in the future. Investors may feel a little wary to entrust control over the entire company to Zuckerberg given his age and what happened with Apple – it will be fascinating to watch whether his role declines over the next few years.


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