All about...Facebook's IPO

Does its advertising prospects justify the float's price, asks Alasdair Reid.

Mark Zuckergerg: chief executive, Facebook
Mark Zuckergerg: chief executive, Facebook

Last week, The Wall Street Journal pointed out that if, following its anticipated initial public offering later this year, Facebook is valued at anything in the vicinity of $100nn.

That will represent a price-to-sales ratio of around 26 to 1. In other words, it will be three times more expensive than Google was at its IPO – and nearly 40 times more expensive than the average large IPO of the past four decades.

Ay caramba! The WSJ went on to point out that, in order to justify this pricing (and $100bn in post-flotation trading is, indeed, what the initial hype is indicating), Facebook will have to be three times more successful than Google – and Google just happens to be one of the most successful companies in recent economic history.

In other words, we could argue (to take a naively one-dimensional view of such matters) that your money would be safer backing Lord Lucan to ride Shergar to victory in this year's Derby.

So, if you were to listen to some cynical commentators, you might be forced to conclude that we're witnessing what happens when gullibility meets some of the more aggressive forms of graft.

Interestingly, there are those who also argue that we're seeing something above and beyond mere gullibility in play here.

We might just be about to witness the first overt fiscal manifestation of something that has been a tacit fact of life in media circles for many months now – the notion that enthusiasm for (and unquestioning belief in) Facebook (and social media in general) now aspires almost to an article of religious faith.

These days, it is regularly talked of in language more appropriate to a millenarian cult – and it is revered as part of a holy trinity alongside Apple and Twitter.

The potential of its transformative effect – in financial as well as social terms – is now, in some circles, regarded as beyond question.

You don't have to be entirely gullible, for instance, to believe that social media, consumed via smartphones, has brought (or will soon bring) democracy to the Arab world and will be enshrined as the beating heart of Western political freedom when President Obama wins the 2012 Twitter election in the US.

Likewise, in commercial circles, it is believed that Facebook can soon become a gatekeeper for all transactional activity on the web and thus will effectively levy a tax on digital commerce, just as Google has been able to levy a universal tax on online curiosity.

There are other interpenetrating circles of vested interest here.

For instance, there are significant numbers of people in advertising (and in the wider world too, clearly) who have effectively bet their careers on social media reinventing the economy – and, quite possibly, in the process, revising the rules of arithmetic too.

But Facebook happy-clappers are easy to spot – they're the people who find the Book of Zuckerberg (quoted in part below) as moving as Ecclesiastes or the Song of Solomon.

  1. By the end of 2011, Facebook had amassed 845 million account registrations worldwide, with more than 50% logging in every day. In 2011, it posted revenues of $3.7bn, up from $1.97bn the year before.
  2. The IPO (whose date has yet to be announced) will involve only a small percentage of the company's equity - and investment banking sources believe that it will launch at a price valuing the company at around $60bn, giving launch underwriters a tidy windfall should the price surge in subsequent trading.
  3. In his letter last week to aspirant Facebook shareholders, Mark Zuckerberg made it clear, lest there be any misunderstanding, that Facebook is more than a mere business. It is destined, in fact, to be both the harbinger and the ultimate fulfilment of a new order.

Thus: "Facebook was not originally created to be a company. It was built to accomplish a social mission – to make the world more open and connected.

We think it's important that everyone who invests in Facebook understands what this mission means to us – how we make decisions and why we do the things we do."

The letter continues (and, we admit, we may have boiled it down a bit):

"Technology ...

tipping point ...

internet ...

mobile phones ...

transform many of our core institutions and industries ...

huge opportunity ...

help create a stronger economy ...

improve ...


What it means for...


  • Financial analysts told Campaign last week that advertisers should wish Facebook well in its IPO. This, they argued, should launch the company on to a new growth curve – one that could easily surpass Google's revenue performance across the noughties.
  • One analyst said: "Here's a company with more than 800 million users – and it knows their age, their relationship status and their likes. That's surely manna from heaven for advertisers."
  • To date, many advertisers have resisted buying into the notion that social media is developing a new type of advertising – one that's more effective because it's embedded into dialogues between friends. They'll resist its inventory being priced up in new ways – just as they'll resist picking up the tab if Facebook decides, at some point after the IPO, that it needs to massage investor confidence.
  • But they're also aware that they're in a strong position. Facebook knows that if it over-eggs the commercial side (thus increasing supply of inventory), users might begin to defect. Or, alternatively, if it tries to extract more of a margin from its existing levels of advertising, advertisers will walk.
  • Yet Ian James, the chief digital officer, EMEA, at Starcom MediaVest Group, concludes: "On balance, I'm bullish. Facebook is creating its own economy and ecosystem – and what it's doing now is eminently scalable."

The new Jerusalem

  • If we were in the business of political agitation, we'd include a colourful little graphic here about how many soup kitchens you could run on $100bn – but we're not, so we won't.