An IPO of Epic Proportions

According to an article by Shayndi Raice published today in the Wall Street Journal, Facebook, Inc. is moving closer to an Initial Public Offering. It is expected that Facebook will make its offering in mid-2012. As the article outlines, "Companies often explore an IPO once they have $100 million in revenues." In stark contrast, Raice points out that "Facebook is expected to debut with more than $4 billion in revenue."

These numbers are extremely impressive. What's even more impressive is this company was founded by Harvard University student Mark Zuckerberg a mere seven years ago in his dorm room. The fact this company has grown to a potential valuation of more than $100 billion in seven short years is more than impressive, especially given the fact they have grown during a major economic recession. To top all of this, Facebook is expected to make an offering of approximately $10 billion. According to the article, this will place them in company with only three other United States issuers of more than $10 billion in size including Visa, General Motors, and AT&T.

This is an IPO that is sure to have a significant impact on the United States economy. Facebook has already had a major economic impact on not only the United States economy, but on the international economy. Marketing and communications have forever been changed in huge proportions due, in large part, to the innovation of Facebook, Inc. I ask myself...has there ever been a company, a web company to be exact, that has created this kind of economic impact?


Papa Smurf said...

The growth and popularity of Facebook is mind-blowing to me. The article states that there are over 800 million users and that 500 million of those users log in daily. With such growth and immense popularity it is hard to see Facebook dwindling off in the future. One of the greatest strengths that Facebook has is that it is a free good; of course there is the opportunity cost of what the user could be doing if not on Facebook. If an IPO is called for many investors will feel that it is a safe, conservative, and growing investment, and because this will be the view the demand for shares in the company will increase. I am excited to see what will happen with an IPO for Facebook.

Ethan said...

The growth of Facebook has been absolutely unbelievable. For being a social networking firm it is in a class of its own. Could Facebook be considered at this point a monopoly? There are no other real competitors. Facebook owns the market on social networking. What is more amazing is that they offer their product free to the consumer. I am amazed at how much advertising money companies are willing to spend on display ads, and I wonder how effective this advertising is. The book talks about the profit-maximizing advertising-sales ratio (page 209) and I wonder if companies advertising on Facebook are able to accurately calculate theirs.

Dr. Tufte said...

Yes, sjenn, I think that Google, Microsoft, Apple, and believe it or not Yahoo have had such an impact. I'd add AOL, E-Bay, Lotus, Novell, WordPerfect, Corel, SAP, Oracle to that list.

I do think Facebook is in a somewhat different league, where its financial importance may be overstated, because it has stalled for so long about having its IPO. Personally, I think they are in serious danger of "missing their moment".

Both Papa Smurf and Ethan have hit on the point that Facebook is "free". There is a saying in marketing: "if you think the product is free, then you don't realize that you're the product". I think that Facebook may have missed their moment because of growing awareness of this amongst users.

Ethan remarked that Facebook may be a monopoly. I absolutely think it is. The thing is, and it's something I can't emphasize enough in ManEc, monopolies are much more common and much less profitable than people think. The real questions are: 1) is its demand is inelastic enough to make mark-ups big enough to cover costs, and 2) how elastic will its demand be in the long-run (and how far off is that long-run). No knock on Facebook, but the experience of other internet firms suggests that window is small and closing fast.