There have been mixed reactions with Internet IPOs from companies such as LinkedIn, Groupon, Zynga, and Yelp in recent years, with not all of them having a successful start.

With Facebook’s high initial market capitalisation, the initial share price set in the IPO are seen by many analysts as a bit on the expensive side, especially when the initial valuation have already factored an assumption of high revenue growth projections for the next five years.

However, over the long term, there is no doubt that Facebook is in a very strong position to leverage its global reach as the world’s largest social media site, with close to a billion users.

According to Frost & Sullivan, while Facebook is already mature in terms of number of social media users, and facing growing competition from Google in this area, it is still relatively immature in terms of their advertising model, which is where the vast majority of its revenues currently come from.

“Facebook is currently finding it difficult to compete with Google’s more mature and more developed advertising platform. To gain full industry confidence, it will be critical that Facebook spends a lot of time and resources developing its advertising model further. Just recently for example, General Motors withdrew its USD 10 million advertising budget from Facebook,” says Frost & Sullivan Analyst.

He added, “On the flip-side, Facebook’s immature online advertising model, combined with their massive global reach, gives them huge potential to grow for very high revenue growth over the longer term and compete head on with Google in terms of advertising revenues.  Google on the other hand while still displaying solid growth in online advertising revenues, no longer has the potential for such rapid growth due to its more mature advertising platform.”

According to Frost & Sullivan forecasts, whilst the opportunity for revenue growth is immense, one area Facebook will need to be cautious about is in the area of privacy. Many Facebook users have complained about its privacy settings over the past few years and as a result, some have turned away from Facebook.  “It is imperative that Facebook addresses privacy issues in order to not get on the wrong side of Governments. If judiciousness is not exercised, the privacy issue could even lead to a complete ban on Facebook by a country’s government. By now, some countries have limited Facebook usage or completely banned it, like China. As such, regulation by country regarding privacy laws are something that Facebook needs to be mindful as it could potentially limit their growth and ultimately their revenues.

Facebook has recently begun to explore new business models and opportunities in areas such as online shopping, in a similar way to which Google is now diversifying its business model from its origins as only a search company. Frost & Sullivan expects a lot more action from Facebook in this area during the next few years.

Facebook has so far been successful in making their online platform highly interactive through applications that enable the sharing of media such as photos, content, and videos. Facebook’s recent Instagram acquisition is one example of how it is transforming its platform into a one-stop shop for social media communication and collaboration. It is critical that Facebook continues with this strategy in the coming years and develop richer communications platform where users can, not only Instant Message and make phone calls, but have access to functionality such as video conferencing sessions. Current market indications are that Facebook is fairly well placed to succeed with this strategy over the longer term.

Rushika Bhatia Editor

Rushika Bhatia is one of the region’s leading commentators on business and current affairs issues. She is the Editor of SME Advisor magazine - the flagship title of CPI Business. She is passionate about infographics – with special emphasis on data, research and statistics. Rushika has a Bachelor’s Degree from Indiana University, USA and is also CIMA qualified.

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