From here on out Facebook will be forever evaluated by whether it hits or misses a group of analyst’s expectations, not on its future vision, its dominance of social networking, its investments in long term growth or its potential to make money.
At the moment, there are two ways Facebook does that: Advertising and Zynga. And since the company went public three months ago, each of those two sources of income have been ripped to shreds.
Put mildly, today’s earnings call could be brutal.
Surely you caught the Zynga mess yesterday. The company missed its earnings estimates so badly that one analyst actually apologized to investors in a note titled “We Are Sorry and Embarrassed by Our Mistake.” In other words, we are no longer believers in Zynga, sorry if you lost money because we thought otherwise. Ouch.
Zynga contributed 15% of Facebook’s $3.71 billion in revenue in 2011. That’s a big chunk. In the first quarter, that percentage shrunk to 11%, possibly because Facebook’s revenue is growing faster than Zynga’s, or possibly because Zynga is trying to move its gaming transactions away from Facebook’s platform and onto its own (Zynga.com) and mobile. Regardless, Facebook and its investors shouldn’t count on Zynga as a viable revenue stream.
Facebook’s ads business has come under just as much fire since its IPO. The barrage of “Do Facebook Ads Work?” surveys, studies, reports and anecdotes has been never-ending. There was the Reuters survey that says nobody buys things based on Facebook ads (but who would actually respond yes to that question?). There’s the report that shows Twitter mobile ads are far more effective than Facebook mobile ads. The doubts are there. Even Facebook knows as it educates advertisers on how to effectively use its platform, the formats are a work in progress. And of course GM pulled its ads, which Sheryl Sandberg managed to win back over some rosé at Cannes.
In addition to Sandberg’s coup, Facebook has fought back: The company released a comScore report that illustrates the “Power of the Like” that seems to be half education to advertisers and half selling the market on the effectiveness of its ads. The company is using PR to fight “the myth” that Facebook ads don’t work. For example, this report that says Facebook has been able to charge much higher prices for its Sponsored Stories ad products.
By now, I imagine anyone holding Facebook stock believes in the company’s long-term vision. Particularly, its vision beyond advertising. We know that digital advertising, especially without the sweet, sweet intent of search, does not a $100 billion business make.
That’s why, if you recall, venture capitalists and secondary market investors spent the last five years falling over themselves in excitement over the company’s IPO. Now that it’s here, Facebook’s new retail investors want some hints as to where the next several billion in revenue are going to come from.
There is payments, an area that is is widely considered to be Facebook’s next big opportunity. On its quarterly reports, “Payments” is the category of revenue that Zynga falls into. The hope is that Facebook will expand this category beyond small game-related transactions and into virtual wallet territory.
The company has also said it will take its realtime bidding ad exchange off its own site to be implemented across the web. It’s another ad-related product but unlike the Sponsored Stories Facebook is hand-holding its advertisers through, this opportunity has advertisers salivating, because no other site on the Web has as much data about so many people, voluntarily supplied with a real name attached, as Facebook does. There’s also dating, e-commerce, and search. Perhaps one of its acquisitions from this quarter–Karma? Face.com?–could create new streams of revenue. (Certainly not Glancee or Instagram, or the three acqui-hires Lightbox, Pieceable, and design agency Bolt Peters.)
As Facebook vehemently defends its ad business, investors, reporters and market observers will be waiting to hear any hint of new revenue streams. Meanwhile Zuckerberg, protected in his fortress of dual class shares, doesn’t seem to care. He’s not out to please Wall Street. That much was clear in his IPO-day speech: “Our mission is not to be a public company,” he declared. Well, you are one. With investors who are going to want some answers. A fortress can keep you employed, but you can still hear the torches and pitchforks of the peasants below. Just ask Mark Pincus today.