Facebook’s 150-page IPO prospectus reveals a number of potential threats to the social network’s future, including a trio of big-name technology companies that could stunt its meteoric growth.
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These corporate rivals should be carefully assessed as investors consider whether or not Facebook’s IPO presents a buying opportunity.
Before examining the chief Facebook competitors, it’s important to remember how the social network generated its $3.71 billion in revenue last year-- advertising sales and user engagement. So any company that encroaches on those principal revenue streams should be perceived as a threat.
Threat #1: Google (NASDAQ:GOOG)
It’s clear that while these two companies collaborate in some areas, they are the biggest threats to each other right now as they battle over ad dollars and eyeballs.
For Facebook, the obvious worry is Google+, the social network launched last June that claimed 90 million users in January, up 125% from October. While Facebook’s 845 million users tower over this fledgling new venture, a migration to Google+ would spell trouble for Facebook.
At the same time, Facebook warned in its SEC filing that Google or other companies could use “strong or dominant positions” to “gain competitive advantage” by integrating social networking platforms or features into search engines, web browsers or mobile device operating systems. Google has strong positions in all three via its leading search engine, growing Chrome browser and soaring Droid operating system.
Meanwhile, Google is a direct competitor in the $12.33 billion U.S. display ad market. In 2011, Facebook was forecasted by eMarketer to capture 16.3% of that market, compared with 9.3% from Google. Both companies are seen increasing their market share in 2012.
To keep growing, Facebook “needs to suck as much advertising dollars out of brands as possible,” said Jeffrey Bussgang, general partner at Flybridge Capital Partners, an early-stage venture capital firm.
Threat #2: Microsoft (NASDAQ:MSFT)
Don’t let Microsoft’s 1.6% stake in Facebook fool you, this company is a major challenger in terms of ad revenue and user interaction.
On the ad side, Microsoft threatens Facebook through a slew of properties, including MSN, the Bing search engine and Windows Mobile. Last year Microsoft captured 4.9% of the U.S. online display ad market, eMarketer estimates.
Facebook may also be eyeing the treasure trove of $10.6 billion of cash sitting on Microsoft’s balance sheet, which could enable it to make strategic acquisitions.
This micro blogging site, which has yet to go public, doesn’t pose much of a risk yet to Facebook on the advertising front as its 2012 revenue is projected at less than $300 million.
However, Twitter does present Internet users with another place to spend their online time and communicate with friends and family. As Twitter continues to grow -- it has some 100 million active users -- that danger may as well.
“Facebook is in the business of communication. Anybody who can facilitate a more precise or quicker communication should be perceived as a threat to Facebook,” said Tim Loughran, a professor at Notre Dame.
4.) Foreign threat
In its SEC filing, Facebook also identified a cluster of foreign social networks, including Google’s Orkut in Brazil and India, vKontakte in Russia, Cyworld in Korea, Mixi in Japan.
While it doesn’t compete there yet due to regulatory issues, Facebook also pointed to three Chinese social networks: Renren, Sina and Tencent.
The main fear is that these foreign social networks will inhibit or slow Facebook’s global growth, which is crucial if it seeks to justify a market value that may hit $100 billion.
What About Us?
It’s also interesting to note two big-name companies Facebook left out of its competitor section: Apple (NASDAQ:AAPL) and Yahoo! (NASDAQ:YHOO).
While Apple is a consumer electronics manufacturer, the two companies may compete more in the future as Facebook searches for new ways to increase users’ time on the social network with video, payment and mobile offerings.
“There’s a lot of pieces that might begin to encroach on Apple’s territory,” said Bussgang.
At the opposite end of the spectrum, Yahoo! wasn’t listed as a competitor despite being the market leader in the U.S. online display ad market until Facebook leapfrogged over it this year.
“I thought it was kind of a slight that they weren’t even mentioned,” said Bussgang.
The struggling Internet company, which is worth just $20 billion now, also owns a slew of media properties that draw a massive monthly audience.
“It shows you how quickly the giants have fallen,” said Loughran.
That’s a lesson Facebook would be wise to remember.