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The dark side of Facebook’s IPO

What will a post-IPO Facebook look like? — was the first part of a two-part series focusing on some of the key areas that will likely benefit from the social media leader's going public. Today's piece looks at the darker side of the equation.

If you think Facebook's initial public offering is the second coming of tech, think again.

Investors jockeying for position in advance of Facebook's NASDAQ debut tomorrow have had their hopes buoyed this week by a couple of changes to the offering — an increase in the target price and a boost in the number of shares to be offered — that, if they play out, could raise upwards of $18 billion amid the largest tech IPO in history.

Despite the ever escalating numbers, however, investors and other stakeholders may want to back away from the stampeding herd and ask themselves whether or not the company is setting itself up to fall short of impossibly lofty expectations.

The reason the company could end up with a $100 billion valuation is based on expectations that the meteoric rise of the last eight years will continue unabated as subscriber numbers climb and engineers figure out new ways to keep them engaged long enough to see the ads. The problem for Facebook, however, is one of expectations, and how it intends to manage them over time. The company's vulnerabilities can be broken down as follows:

1. Visibility and agility

As agile as Facebook was when it was founded in Mark Zuckerberg's dorm room, it's a wholly different animal now. The giant-killer that blindsided Google and Microsoft with an entirely new spin on social networking is now a giant in its own right.

Its inherent momentum and core identification as a leading social media company potentially blinds it to the flanking types of competitors that often seem to come out of left field. In some cases, it might see them initially emerge from the ground clutter, but it's so focused on evolving its core competencies that it risks failing to adapt to whatever changes come along that will inevitably render social networking yesterday's news.

Unless the newest IPO darling prepares for the inevitable post-social market, it risks eventually being left behind by threats it never saw coming.

2. Scope

Right now, Facebook is a platform without a focus. Gaming exists cheek by jowl with businesses aiming to build a marketing presence in much the same way they once did on the broader Web. Audiences are ill-delineated, and weak-to-nonexistent analytics make tracking activities far more difficult inside Facebook's walled garden than it should be.

Facebook needs to refine its value proposition for each of its audiences, then introduce management tools for each of these groups so that professional services advertisers, for example, aren't wasting resources on gamers who might never have an interest in what they have to sell. Until Facebook decides what it wants to be when it grows up, it faces the same risk MySpace did, namely an inability to deliver fully unique value-adds to users, who are then easily wooed elsewhere by competitors willing and able to do just that.

3. Mobility

Facebook is a social media company circa 2004 that has thus far largely failed to adapt to the mobile revolution that began to rewrite Internet history years after its founding. By far the company's most mature channel is the web, and it plays best through a browser on a conventional desktop or laptop computer. Its mobile apps are typically late to the party and, when they arrive, are less than feature-complete. It isn't clear yet whether Facebook understands the recipe to convert users into revenue on mobile platforms. As more online activity shifts to smartphones and tablets, the need only becomes more urgent.

Facebook's problem: it's trying to shoehorn an old-style Web 2.0 model into a post Web 2.0, mobilized world, and despite big-ticket acquisitions like Instagram — largely designed to give it some mobile street cred — the company is still spinning its mobile wheels.

The sky-high numbers may be making investors giddy, but they're also putting Facebook into previously uncharted, potentially unwelcome tech industry territory. Google's valuation when it first went public was just over $23 billion, while Amazon's was a mere $438 million.

Following their respective IPOs, these companies were given years of leeway by investors to validate their respective business models and build out sustainable and growing revenue streams. Facebook's relatively huge initial valuation means investors will expect miracles sooner, and won't have the kind of patience to let their uber-promising new holding figure it out.

With 900 million users already, the growth rate will flatten out sooner rather than later. Mobile weakness is already threatening revenue growth, with the company recording a 6.5 per cent quarter-on-quarter decline in its most recent reporting period. Alarmingly, profit was off 12 per cent year-over-year, and 32 per cent compared to the previous quarter. Continued debate over Facbeook's handling of data privacy and its inability to smoothly evolve its feature set add even more clouds to its future.

While no one is saying Facebook is at imminent risk of collapse, the historically superheated expectations being driven by the IPO stampede could be due for a serious correction once Facebook faces its first few months under the microscope of public ownership. Reality could be a tough lesson for investors who think the road ahead is perfectly smooth. Unfortunately for them, it promises to be anything but.

Carmi Levy is a London, Ont.-based independent technology analyst and journalist. The opinions expressed are his own.

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