Facebook unveiled two significant product upgrades last week: Timeline for brands and a premium advertising platform. But an addendum to Facebook’s initial public offering prospectus filed with the Securities and Exchange Commission Wednesday suggests those two products may be fighting against each other.
The addendum is mostly a worst-case scenario look into Facebook’s future, outlining possibilities ranging from “the loss of” founder Mark Zuckerberg and Chief Operating Officer Sheryl Sandberg to substantial service outages. But, in addition to ad growth obstacles, the document did shed new light on Facebook’s operations, including an acknowledgement it can’t verify all of its 845 million users, $8 billion in new credit facilities and a warning about the 2015 expiration of a lucrative agreement with Zynga.
In the addendum, Facebook said “decisions by advertisers to use our free products, such as Facebook Pages, instead of advertising on Facebook” would negatively impact its ad revenue growth. It also reiterated its mobile concerns, noting “increased user access to and engagement with Facebook through our mobile products, where we do not currently directly generate meaningful revenue, particularly to the extent that mobile engagement is substituted for engagement with Facebook on personal computers where we monetize usage by displaying ads and other commercial content.”
The report noted that most of its current mobile users continue to access the site through their computers as well, but that the percentage of mobile-only users is increasing.
Fake Users
Since Facebook filed its IPO, pundits have questioned claims that it has 845 million active monthly users. That number is expected to hit one billion sometime in August, but yesterday Facebook conceded it can’t verify that between 5% and 6% of those accounts are duplicates.
“There may be individuals who have multiple Facebook accounts in violation of our terms of service, despite our efforts to detect and suppress such behaviour,” the filing said. It also noted that some mobile users may be automatically be contacting the site for application updates while having no other contact with Facebook.
Wall Street Doesn’t Flinch
None of the concerns raised in the filing appear to have scared off Wall Street: the filing also notes that Facebook added 25 new underwriters to the initial public offering, bringing the total number to 31.
The report also noted two new credit facilities: one for $5 billion for general working capital and one for $3 billion to cover tax obligations. As previously reported, Facebook is taking the slightly unusual step of covering taxes for employees who receive shares as compensation as part of the IPO.
Zynga Dependence
Yesterday’s filing once again highlighted Facebook’s dependence on Zynga last year, at a time when the game maker has been looking to make its business model less reliant on Facebook. The social network said 12% of its $3.7 billion in 2011 revenue was attributable to Zynga, up from less than 10% in both 2010 and 2009.
Facebook’s agreement with Zynga could be even more troubling three years from now, when a five-year deal the companies signed in May 2010 expires. Under the terms of that agreement, payments for virtual and digital goods in Zynga’s games are made exclusively through Facebook’s payment platform, allowing Facebook to keep 30% of the revenue from those transactions.
If Zynga is successful in launching its own Web site and partnering with other social networks to distribute its games, it may be in a better position to renegotiate the terms of that deal in its favor.
Indeed, most of the more likely scenarios outlined in the document filed with the SEC Wednesday stressed Facebook’s need to diversify its revenue base, 85% of which came from advertising last year. The company said that it currently generates “no significant revenue” from mobile and its “ability to do so is unproven.”
