Why Facebook needs new friends to net sale of the century

On Friday, Zuckerberg is due to ring the bell at New York’s stock exchange, marking the flotation of the company which began in his Harvard dorm and the start of what has been dubbed the sale of the century.

With investors already falling over themselves to be first in the queue the share price has risen raised from $28 to $35, making the company worth $100bn (£62.2bn). If all goes to plan, an all early indications suggest it will, Facebook’s value will eclipse Disney, Kraft Foods and a hundred other corporate giants.

Already one of the world’s youngest billionaires, the notoriously frugal Zuckerberg won’t be the only winner. Reports suggest that Facebook employees will be in line to share around £16bn. Even the graffiti artist, who accepted share options in lieu of payment when he created the murals in the company’s first headquarters could collect an impressive £120m.

Having attracted 845 million users in the last eight years, Facebook has been one of the undoubted success stories of the social networking age, so what could possibly go wrong? Well, despite the impressive statistics, from its 157 million Amercian users to the 300 million photos which are uploaded on to the site each day, not all the figures currently add up.

In the first quarter of this year, the number British Facebook users fell by two per cent. With 28.6 million still regularly logging on, it’s not the kind of dip to give Zuckerberg sleepless nights, but the pressure of working out how to generate revenue from its millions of devotees might.

In the early days, most accessed the site through their computer, with Facebook selling online advertising and other commercial content. Fast forward to today, and more and more of us are logging on via the small screen of mobile phones where it’s much more difficult to insert advertising messages.

Add in the $1bn it spent buying the photo sharing app Instagram and the fact many once die-hard Facebook users have switched to rival social networking site Twitter and there are some industry experts wondering whether Facebook’s flotation will fail to live up to the hype.

Certainly, the technology market is littered with cautionary tales. Take Friends Reunited bought by ITV in 2005 for £175m and sold four years later for a knock-down £25m. Or MySpace, which until four years ago was the most visited social networking site in the world. Bought in 2005 by News Corporation for $580m, it was sold three years ago for just $35m. “Many people are still nervous about investing in technology following the dramatic boom and bust of stocks at the beginning of the millennium which left investors badly shaken and nursing considerable losses,” says Patrick Connolly, from financial planners AWD Chase De Vere.

“While the growth of Facebook to date has been phenomenal, investors could end up paying a share price which cannot be justified.

“Investors in social media stocks haven’t fared particularly well in the past and it is often difficult to have real confidence in their business models and to see how they will be able to generate consistent and growing revenues.”

However, Facebook’s greatest obstacle to domination may not be nervous investors, but a backlash by the very users who have made it such a success.

“At the moment Facebook is an incredible proposition and while it may be only eight years old, for an internet company it has a certain amount of longevity,” says Paul Allen, editor of Computeractive Magazine.

“However, the next step – showing that it can generate revenue from all the amount of information it holds – is huge, it’s the Holy Grail that no one yet has found.

“McDonalds makes money because, like it or not, it gives people something they want and something they are repared to pay for time and again. However, the underlying philosophy many people have with the internet is that everything has to be free and anything which challenges that can have a major impact.

“Zuckerberg and his colleagues say they have worked out a way to move Facebook forward, but what that transpires to be is anyone’s guess. Companies are moving away from traditional display advertising and instead want their brands to be talked about. That’s something which is already happening on Facebook, but quantifying it and putting a price tag on it is incredibly difficult.

“If I had money to spend on shares, I wouldn’t be putting it in Facebook, I’d be putting it in Apple.”

[email protected]