Will Facebook Be The Next Apple?

Unless you’ve been living under a rock, you’ll have heard about Facebook filing to become a public company,with the hope of raising at least $5 billion. Unlike most public companies, Facebook will not have a board filled with bureaucracy. Instead, CEOMark Zuckerberg will have ultimate say in Facebook's affairs. That method worked for Steve Jobs and Apple, but can it work for Facebook? Can visionary leadership always win out against harsh business realities?

Facebook is an incredibly secretive company, much likeApple, but thanks to its S-1 SEC filing (which you can read on the web or as PDF)the world was able to read, for the first time,quantifiable information about Facebook’s performance. The report confirmed that Facebook has been profitable for several years, and its revenue is estimated to reach $15 billion in 2014. There are845 million monthly active users with 100 billion friendships. Between thoseusers, 2.7 billion likes and comments have been made and 250 million photos are uploaded daily.

Facebook reported that its monthly active users and daily active users are increasing at a steady rate, and the charts have yet to even reachan inflection point. However, only 483 million users were active on a daily basis in December 2011. Any socialnetwork faces the risk that users will move away, and we can see that 43% of Facebook users don’t bother to check the site more than once a month. How thispercentage changes over time will be indicative of Facebook’s future profitability and quality of user experience.

The SEC filing showed that Facebook only has two significant sources of income, advertising and fees from its payments infrastructure, i.e.Facebook Credits. That’s quite a narrow range, and the report states that Facebook intends to diversity its revenue sources. However, sustaining advertising income shouldn’t be a problem given that the global advertising market is growing despite the global recession. The majority of the profit from Facebook Credits has been driven by Zynga Games – so much so that the two companies are now quite interdependent.

The report made absolutely clear that Zuckerberg is retaining control of the company.

Our CEO has control overkey decision making as a result of his control of a majority of our voting stock.

As a result of voting agreements with certain stockholders, together with the shares he holds, Mark Zuckerberg,our founder, Chairman, and CEO, will be able to exercise voting rights with respect to an aggregate of shares of common stock, representing a majority of the voting power of our outstanding capital stock following our initial public offering. As a result, 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. In addition, Mr. Zuckerberg has the ability to control the management and affairs of our company as a result of his position as our CEO and his ability to control the election of our directors. Additionally, in theevent 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.

While it is common for a public company to fall into a disabling amount of bureaucracy (e.g. HP), Facebook is avoiding this – just as Steve Jobs did with Apple. In many ways, Apple has defied much conventional wisdom of how to run a public company. Consequently, there is a growing sense that running a business more like a dictatorship than a democracy is the way to preserve the originalmission.

Zuckerberg clearly has a vision for Facebook, just look at this quote from his unconventional covering letter:

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.

In less eloquent terms, Zuckerberg is warning investors that things will be done according to his mission and so they better know this no was there’ll be no complaining once they’ve bought in. However, will investors who want a quick return really care about Facebook’s mission? If shareholders aren't happy, no amount of mission statements will change how they feel about Facebook's bottom line.

Let’s look at the Steve Jobs example. After having co-founded Apple, he was subsequently kicked out. However, upon his return he was allowed to control the company in his special way because he madeApple the most profitable company on the planet.

Meanwhile, Zuckerberg’s statement suggests that he will prioritise advancing the functionality of Facebook above turning a profit. Furthermore,the SEC filing stated (on page 21) seventeen distinct ways in which Facebook’s profitability could be reduced, including reliability of the product, user engagement and acceptance, competitors, regulatory legislation, etc.

Also consider that with 845 million users, one has to ask how many more people are left to join Facebook? There are huge swaths of potential users in China, but - as Google discovered -China is a difficult country to do business with, thanks to its intense censorship and human rights abuses.

Contrast this to Apple who were competing against MicrosoftWindows on desktops and laptops, and reinvented both the MP3 player and smartphone markets. In both cases, Apple had a virtually inexhaustible potential for growth. This is not the case for Facebook.

As soon as Facebook has a quarterly report that doesn’t meet expectations, pressures will mount for a change of policy or even CEO(legitimately or otherwise). We should point out that analysts and stockholders are a fickle lot, who are only interested in short-term gains and don’t look to sustainability or believe in long-term goals. The current global financial crisis is the most prominent consequence of such mind-sets.

Therefore, if we take Apple and Steve Jobs as a template,Mark Zuckerberg could do well by maintaining king-like control over Facebook,but only for as long as the profits stay healthy.

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