The Facebook IPO will be another stunning milestone in internet history: a first-day trading value that 's likely to exceed $100 billion and a capital raise of more than $13 billion.
Will Facebook live up to these lofty levels, and the substantial growth expectations on which they're based? To answer that question, consider a few examples from the last 12 years:
AOL, circa 2000: Remember when AOL was the big kid on the internet block? It's hard to imagine, given AOL's demise over the past 12 years, but at the peak of the dot-com bubble, before it acquired Time Warner in January 2000, AOL was valued at more than $150 billion. And keep in mind that AOL's value wasn't all dot-com froth and accounting irregularities. AOL generated more than $5 billion in revenue in calendar-year 1999, and more than $7 billion in 2000. That year AOL had a seemingly insurmountable advantage as a branded ISP -- with eight times the number of subscribers as its closest rival -- even as it began preparing for the inevitable transition to a broadband world. So what lessons can we take from AOL's complete meltdown (both financial and operational), when prognosticating about Facebook? AOL is an ideal example of how the mighty can and do fall. Facebook seems absolutely impregnable at this point: With more than 900 million users, what could possibly go wrong? A lot.
Google, circa 2004: AOL may once have been the big kid on the Internet block, but by 2004 Google seemed to own the whole block. The search-engine behemoth was then handling a whopping 85% of all search requests. Soon it was rewarded with a successful IPO, and a market cap that climbed beyond $50 billion by June 2005, and then to stratospheric levels north of $200 billion more recently. Much like Google's dominance in search, Facebook now dominates social media (generating half of all social log-ins, and an even greater share of time spent). So Google's strong record of growth during the last eight years points to Facebook making a similar run, right? Probably not. Google paired its virtual monopoly in search with an equally strong virtual monopoly over the high-value, intent-based search advertising market. Facebook has a strong, but comparatively weaker, position in a comparatively weaker advertising segment (display). Look at Facebook's less-impressive trailing quarterly growth rates in the quarters leading up to its IPO as evidence of this disparity. Facebook can and should learn from Google in how to maximize its growth potential, including by leveraging its core dominance to diversify into strong, adjacent lines of business. But if you think FB shares give you a piece of the next Google, think again.
Amazon, circa 2008: Facebook virtually invented the social media category (not by being the first social media site, but by introducing social media to the Internet masses), in the same way that Amazon virtually invented the online mega-commerce category. Starting as one of the granddaddies of e-commerce way back in 1994 with an initial focus on selling books online, by the end of 2008 Amazon was already generating nearly $20 billion of topline revenue and more than $800 million in operating income, marketing a wide variety of physical and electronic products and services. For its next act, Amazon more than doubled that topline to nearly $50 billion in 2011, popularizing both the sale of e-books and the e-reader category (increasing its market cap from $25 billion to more than $100 billion in the process). Does Amazon's growth and continued dominance offer any guidance for Facebook's future?
They represent very different business models, of course. Nonetheless, one of the keys to Amazon's success is the variable most likely to assure Facebook's continued value: consumer data. Amazon didn't simply adapt existing merchandising models to the online environment. The company also took full advantage of the enormous amount of online data customers generate through their purchases on and usage of Amazon's sites. This trove of data fueled Amazon's marketing analytics, and Amazon converted it into direct value for customers through smart recommendations -- driving revenue per customer higher in the process. To an even greater extent, Facebook's current value and future potential is grounded in its unprecedented access to demographic, social and behavioral data. Though Facebook's deep data doesn't assure a march to a trillion-dollar market cap, it should serve as meaningful downside protection by enabling Facebook to continually improve and customize its service offerings, and thus to grow revenues for the foreseeable future.
So what's the bottom line? Facebook will need to fight a constant battle if it wants to maintain its dominant position amid ever-shifting consumer preferences and changing technologies. Facebook's management seems sufficiently self-aware to avoid the total implosion of an AOL, as evidenced by Zuck's decisive move to acquire Instagram. Nonetheless, at a $100 billion valuation, I would lose sleep as a public Facebook investor over whether the company can really dominate mobile-social over the long run, and find a way to convert its data-driven potential into Google-scale profitability or Amazon-scale revenue growth.