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Volte face on Facebook

By John Harrington

Date: Tuesday 22 May 2012

Volte face on Facebook

The flotation of social networking web site Facebook had been hyped to the heavens, but with the journey proving more exciting than the arrival, the finger pointing has already started.

The stock was floated at $38 a share on Friday, May 18th, and interest was high enough for the well-paid financial institutions that handled the flotation to give themselves a modest pat on the back and a maybe not so modest bonus.

The shares did not exactly take off like a rocket on Friday but at least they finished the day higher; not so on the second day of trading, as the stock fell 11% to $34.03.

That has sparked some grumbling, with Michael Mullaney, head of investment of Fiduciary Trust, among those happy to point the finger of blame at investment bank Morgan Stanley.

The investment bank was the lead underwriter among 33 companies that Facebook hired to get the $1bn flotation away, and the suspicion is that the great and the good among the Wall Street investment community might have got just a bit too greedy - hard though that it is to believe - to ensure a healthy after-market.

In consultation with Facebook executives, Morgan Stanley decided to raise the number of shares issued and the flotation price just days ahead of the stock market debut, in spite of warnings by other underwriters, according to reports.

The soft after-market will provide some comfort to Facebook sceptics who have been cast in some circles as killjoys in recent days.

Dr Mariann Hardey, a social media expert from Durham Business school encapsulated many of the doubts over Facebook's valuation.

"Is Mark Zuckerberg experienced enough to be chairman and CEO [chief executive officer] of a $90bn company?" Dr Hardey asks. Comfortingly, for the Facebook bulls, she reasons that "one could argue that Zuckerberg's experience is considerably more than most CEOs as he has 'grown up' and lives through his own digital profile."

Another big question is whether Facebook can sustain its growth, which has already shown signs of running out of puff, although its profits and marketing activity continue to increase.

"In terms of profits, we (the audience, the users, the investors) have yet to see what the profit margins are. I am convinced that there has to be some tangible indication from Zuckerberg that shows sustainable growth and profits over time before investors will feel confident in Facebook’s long-term activities," Dr Hardey asserts.

The rapid switch to mobile communication devices - smartphones, tablet devices - also represents a challenge and an opportunity for Facebook. Dr Hardey thinks the market believes it is only a matter of time before Facebook launches mobile advertising, with the possibility that it might set up its own advertising platform to market to other sites.

Additionally, there is the "flash in the pan" or "next big thing" danger, which could see Facebook's user base move on, just as MySpace's did, though Zuckerberg's status as an uber-geek may limit the chances of this happening; he is unlikely to get so wrapped up in profit and loss accounts that he forgets to set up accounts on potential social media rivals.

Finally, Dr Hardey highlights the potential pitfalls of privacy issues. "Copyright and how to resolve legislation around the sharing of tagged content across a very public setting is a major concern for the company and some users," Dr Hardey said. "My own research, on how people connect and interact, highlights privacy is an on-going concern in the world of social media," she added.

Meanwhile, others worry about Facebook's ability to make enough money out of its user base to justify its high valuation.

A global survey undertaken by digital marketing agency, Greenlight, reveals 30% of people 'strongly distrust' Facebook with their personal data while 44% say they would 'never' click on Facebook sponsored ads.

Greenlight has some good news for the Facebook bulls, however.

"Although 44% say they would 'never' click on advertisements or sponsored listings in Facebook, it is interesting to see that those who do find the targeting effective and engaging," suggests Hannah Kimuyu, director of paid media at Greenlight.

"Moreover, given the positive growth figures, we at Greenlight predict that more of us will be advertising and hopefully 'clicking' on an advertisement or a sponsored listing on Facebook this year," Kimuyu said.

MG

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