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Clara Shih

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What the Facebook IPO Means

Posted: 05/14/2012 5:55 pm

It's electrifying here in Silicon Valley this week, even more so than usual. Normally, many of us are heads down, focused on our own companies, but right now, even in the land of "what's next?" all anyone can talk about is the Facebook IPO.

This week marks the dawn of a new era. Facebook going public -- with a billion users worldwide and $3.7 billion in revenue -- confirms that Facebook is doing to Google today what Google did to Microsoft nearly a decade ago. It's hard to believe that it's been eight years since the Google IPO.

What's changed since Google was the new, hot company that toppled Microsoft in consumers and investors' hearts?

For one, consumer behavior has changed. In the Google era, people learned to search for information, products, and businesses. But over the last five years, Facebook has altered online behavior. In the Facebook era, people now choose to share and discover rather than simply search for information.

A growing number of people worldwide now get their news as well as learn about products and services through what their friends are reading, liking, and buying -- all this, of course, is broadcast through the Facebook news feed, Twitter streams, and LinkedIn Today.

As a result, Facebook replaced Google as the most visited site in the U.S. in 2010, according to Experian Hitwise. Now, Facebook is even overtaking Google in the amount of traffic it drives to third-party sites, including Guardian UK. By establishing trusted graphs of friends and brands one likes or follows, social networking sites have transformed the way people are making important decisions such as what to read, what to buy, where to buy, and whom to hire.

Hence the $3.7 billion in revenue. And this is just the beginning.

The future is bright

Indeed, Facebook's best days are still ahead. There is strong near-term upside in the new ad formats they have created. New Facebook ad products like Sponsored Stories and Reach Generator, which broadcast Business Page "likes" and posts to wider audiences, are already showing great promise by driving conversion rates higher for marketers.

In the medium term, Facebook is well positioned to monetize on mobile, payments, and international growth. Over 55 percent of its 901 million users are active on Facebook Mobile, and this number just keeps growing as more people get smartphones. In its S-1, Facebook disclosed it already generates nearly 18 percent of its revenue from payments generated from the 30 percent "tax" it charges for transactions involving virtual or digital goods (think vegetables in Farmville -- the broccoli adds up!). On the international front, Facebook has had great user growth but only scratched the surface in terms of monetization.

Long term, the possibilities are endless. The convergence of Facebook and well-established online business models such as search, commerce, and ad networks could be very compelling for consumers, in addition to being lucrative for Facebook. For example, why couldn't search be social? If I search for "digital camera," why should I see the same organic and paid results as my 11-year old niece who would respond much better to a lower-end model that's pink? And why should she or I see the same results as my husband's friend who is a professional photographer and would clearly be interested in a very different kind of digital camera?

Facebook could also partner or compete head-on with traditional offline channels such as TV, digital dashboards in automobiles, and smart billboards enabled with near field communication that tailor their displays to whomever may be nearby.

In conclusion

Silicon Valley is roaring again. From LinkedIn, Zynga, and Yelp to Facebook and its rapidly expanding partner ecosystem, innovation is alive and well. A heartfelt congratulations to the team at Facebook on their IPO and, indeed, for changing the world. Stay focused and keep shipping.

 

Follow Clara Shih on Twitter: www.twitter.com/@clarashih

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