WSD Blog

What Facebook Fears

What keeps Facebook up at night? At this point, you – yes, you – as well as others who may be reading this story on a smartphone.

Within the depths of its $5 billion IPO filing, the "risk factors" that Facebook laid out in its prospectus show what the company believes could harm its business going forward. And though the company's sparkling track record of revenue and profits don't indicate any current problems, the company's worries include a decline in revenue, maintaining a relationship with a key partner, and even maintaining good relations with the press.

How likely are these to come to pass? Some, like slowing user growth, seem inevitable – there are only so many people on the planet, after all. Others, such as the company's worries over the lack of advertising on its smartphone platforms, seem like short-term concerns Facebook will inevitably solve.

And the biggest threat? The one that's almost impossibly hard to quantify – whether users will pass Facebook over for another emerging social network, either Google+ or something altogether new.

Retaining advertising: Facebook notes that its advertising revenue has decreased from 98 percent of its revenue in 2009 down to 85 percent in 2011. In part, that's due to the rise of Facebook's Payments system, which has filled in the gaps. It's hard to believe that brands will suddenly ditch the largest social network in the world, and one that can now afford to attract even more users through advertising.

Likewise, Facebook's risk factors also note that developers may move to other social networks, taking their advertising and user base with them. At this point, that concern looks overblown.

Maintaining a relationship with Zynga: Clearly, this is one of the most surprising disclosures of the prospectus. Zynga represented 12 percent of Facebook's 2011 revenue, or $445 million, and was the company's largest partner. Zynga paid Facebook through a combination of Payments royalties through the sale of virtual goods, or via ads that the company purchased itself or resold to third parties.

While it's likely that both companies recognize the value to the other, Zynga games like Zynga Poker have appeared on Google+, so the company knows how to hedge its bets.

Expanding the Payments platform: Here, Facebook notes the rat's nest of laws governing payments across multiple countries. There's one clause of note: "To increase flexibility in how our use of Payments may evolve and to mitigate regulatory uncertainty, we have applied for certain money transmitter licenses and expect to apply for additional money transmitter licenses in the United States, which will generally require us to demonstrate compliance with many domestic laws in these areas."

Mobile concerns: Here, Facebook's doubts seem to have some justification. The company notes that it is still serving data to users over smartphones, but not selling advertising against it to offset costs. Likewise, the company also notes that it is dependent on Google and Apple not to give preference to one service or another on their own mobile platforms.

Given that Google lately has pointed search users to Google+ via Search Plus Your World, Facebook is right to be worried.

The question of mobile advertising is also an important one. Google bought mobile ad provider AdMob in 2010, surviving antitrust scrutiny to do so. Facebook will either have to buy its own mobile ad technology or develop it own. Proceeds from the IPO, however, will allow it to do either.

Slowing growth: Every service should have this problem. As Facebook notes, the company's revenue grew 154 percent from 2009 to 2010, but only 88 percent from 2010 to 2011.

It's a concern, however. "Our user growth and revenue growth rates will inevitably slow as we achieve higher market penetration rates, as our revenue increases to higher levels, and as we experience increased competition, Facebook says. "As our growth rates decline, investors' perceptions of our business may be adversely affected and the market price of our Class A common stock could decline."

Worldwide competition: Again, this could be a struggle for Facebook. Some know that Orkut, the social network that Google developed and that failed to take off, actually flourished in Brazil. But Facebook reportedly is making inroads. Elsewhere, however, Facebook may face an uphill battle. This wouldn't be so important if Facebook's penetration into North America, for example, wasn't so pervasive.

"Google's social networking offerings, including Google+, and also with other, largely regional, social networks that have strong positions in particular countries, including Cyworld in Korea, Mixi in Japan, Orkut (owned by Google) in Brazil and India, and vKontakte in Russia," the company notes. "We would also face competition from companies in China such as Renren, Sina, and Tencent in the event that we are able to access the market in China in the future. As we introduce new products, as our existing products evolve, or as other companies introduce new products and services, we may become subject to additional competition."

Government action and privacy: Again, a bit of a wild card. Facebook (and recently, Google have both faced government scrutiny of how both services share data, and how they notify users of how their personal information is being used. For example, Facebook settled with the FTC in 2011, entering into a 20-year settlement agreement that requires Facebook to adhere to certain privacy practices. Ireland's data controller also completed a similar audit in 2011.

And since Facebook and Twitter have been used as tools of insurrection around the world, the governments of China, Iran, North Korea, and Syria currently block Facebook either in whole or in part, the company noted.

Third-party app developers could also share data without Facebook's permission, hurting its reputation, the company said. And any damage to Facebook's reputation could affect its brand.

Technical issues: Viruses, server crashes, bugs, and other problems may hinder Facebook's services. The company did note that it doesn't have much experience in building server farms.

Facebook's biggest risk, however - and one it doesn't really address in its prospectus - is the risk that Friendster, MySpace, and other social networks have faced: that consumers may simply turn away from it and search out the next big thing. But with over 840 million users, Facebook also has a long way to fall.

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