Wall Street and Social media – “Un-like”

Summer has not been that great in Sweden. If you spend your vacation here or check the weather history, you will know what I am talking about. But the gloomy weather over Sweden fades to compare with the gloom that has hit the stocks of internet companies such as Facebook, Zynga and Groupon causing the market to call social media stocks the new “dot-com bust”. In the past months, all three of these meant to be “rising star” companies saw a shocking implosion in their stock market value, raising questions about monetization, business models, leadership and how to handle the transition to a mobile world, to name just a few.

The latest (and biggest) IPO – that of Facebook, has recently turned into an investor nightmare as on 1st August the company had lost 45% of the stock market price, which it sold for on the closing of its IPO day (18th May), resulting in about $60 billion been wiped out since the peak of its market capitalization. In the last quarterly report, which Facebook filed to the SEC, the company revealed a net income loss of $157 million, slowdown in growth in US & Canada and most of all, a 67% YoY increase (to 543 million) in the number of monthly active users accessing Facebook through mobile devices, out of which 102 million MAUs access Facebook solely on mobile.

A lot has been written on Facebook’s limited ability to monetize mobile and how the occasional sponsored stories it shows to mobile users, although more effective, cannot compare to the up to seven ads per page it is able to show on a computer screen. What everyone wants to see is Facebook having a clear strategy to tackle the mobile challenge and that remains uncomfortably elusive. In the months since the super costly acquisition of Instagram in April, not much has happened to improve the mobile user experience and one can only hope that some of the other smaller acquisitions that Facebook has recently made (such as Karma, Glancee, Tagtile and Lightbox) would be translated into more tangible and money-making products for Facebook. As growth begins to slow down in developed markets, where the biggest revenues are currently generated, and among reoccurring privacy issues, mobile monetization in a post-PC era will remain the primary concern and danger to Facebook’s future and growth.

With the burden of investor scrutiny that comes with entering the domain of public trading on Wall Street, the pressure will also rise on the 28-year old, media-shy, hoodie-loving CEO Mark Zuckerberg. A looming problem is that he controls 57% of the shareholder votes, which in effect gives him an iron grip on the company, and if investors lose confidence in him and demand a more seasoned leader, is he going to fire himself? I doubt it.

The fall in Facebook’s stock market value, after its last quarterly report was released, followed an earlier drop caused by the poor second-quarter report of its vital strategic partner Zynga. After the release of its report, Zynga saw its stock price plummet immediately by 41%. The trend has not been only negative for Zynga, as the stock price was as high as $14 in March but for those who have stayed along all the way since the December IPO, the closing stock price on 1st August wiped out 70% of the initial IPO stock value. Despite a 19% increase in revenue from a year earlier, Zynga reported a loss of $22.8 million.

The underperformance was blamed on “a faster decline in existing Web games due in part to a more challenging environment on the Facebook Web platform” as well as some poor results from the acquisition of OMGPOP. In reality, the mobile challenge is casting big shadows on Zynga’s performance as game players want to play on the go, and Zynga’s mobile games are not exactly its forte. After the whole virtual goods hype it seems that after all, Zynga’s top paying users are not that enchanted with paying that much real money for their virtual cows and crops. As virtual goods are today Zynga’s main real source of income it needs to adjust its expectations in the future and look for innovative ways to monetize.

Taking a quick look at Groupon, the picture doesn’t get better. After the expiry of the initial public offering lock-up on stock sales by insiders on 1st June, the stock price has dropped significantly. It has turned difficult for Groupon to monetize on its simple business idea. Part of the reason behind that is that it seems not to be able to execute well targeted data and to target users with appropriate offers.

The difficulties facing each staggering company are somewhat different but yet somewhat similar. They all have the problem of selling something — virtual cows, discount deals or, someone ‘‘liking’’ a product — that turns out not to be quite as real and important to users as everyone was hoping for. Facebook’s core product is user data and it has created a whole new way of advertising based on the data users share about themselves, but an underlying problem is the monetization of user data. Unlike Google’s model, which is based on search-related advertising and has an ARPU of about $7 per quarter, Facebook’s worldwide ARPU was only $1.28 for the last quarter and is hardly rising as growth comes from emerging but low-ARPU markets. Investors tend to believe that as long as the users grow, the money will eventually come, but is it time to really look at the revenue per user trend, not just the user growth? The difficulties also show that companies that sometimes easy come into popularity and fashion may also easy go as users’ habits and preferences evolve and innovation is hard to maintain even for young companies.

What are the consequences of this? Apart from the most obvious consequence that enormous wealth has been wiped out and investors such as pension funds and banks (like Swiss UBS Bank) lost tons of money, the flop of the Facebook IPO will make it much harder for other internet companies to go IPO. As a result Twitter has declared that they don´t intend to go public. This will also be hurtful to start-ups and innovation on the private equity arena as venture capital will shy away from social media and internet related companies and projects. In general, the world “social” seems to have lost its magic shine.

All in all, I hope that while you were enjoying the summer sun (somewhere outside of Sweden as we certainly didn’t see the sun here) your pension fund had not been invested in any of the above companies. As the above bad news is enough, I will not even get started on Netflix or Pandora. But to end on a positive note, the future is still to come and maybe some of these falling stars will rise again in stock market value. After all, there are some exceptions such as LinkedIn and at least the “old dogs” Google, Apple and Amazon.com are doing well.

Next read

4G alone will not make magic

I just returned from the Barcelona LTE World Summit where some of the world’s largest operators gathered to discuss LTE technology, more commonly known as 4G. There was a lot of talk about future business models and how to turn LTE into a “revenue generator” with “killer applications”. However, practically none of the companies behind [...]
Read more