Now that Facebook has filed for an IPO, speculation amongst investors abounds whether the world’s #1 social networking site can continue its expansion beyond its current base. It’s true that, Facebook had a 39% increase in membership from December 2010 to December 2011 and revenue increased an astounding 69%. But whether they can sustain that surge in revenue is uncertain. Even the company itself said that their financial results would be difficult to predict and that they wouldn’t be able to assure that they can effectively manage their growth.
Some say that membership in the United States is already nearing a saturation point but I won’t say I agree with that assertion. Still, it’s difficult to determine how many more Americans will sign up in the future. Membership countrywide is currently about 50% with 152.2 million, including an unknown number of members who are not even eligible to join, e.g. children under the age of 13.
Where Facebook hopes to expand membership are in countries with a growing economy such as in India and some countries that currently ban the social media platform such as in China and Vietnam. China will be tough to dominate as it already has their own versions of social networking with at least 15 sites including Sina Weibo, Qzone and Renren with a combined membership of over 1 billion members. More importantly “facing” Facebook would be the government restrictions they would be subjected to if someday they were able to operate in the world’s most populous country. Reuter’s humorously called it the Great Firewall in China.
You may also recall that Google has repeatedly clashed in the past with the Chinese government over censorship and has had a shaky business relationship since founding Google China in 2005. Despite the concerns of blocked access, Google China is the 2nd largest search engine site in China, next to the giant web services company Baidu.com, which is ranked #5 among the world’s most viewed websites so evidence suggests the potential for growth is there.
Where Facebook has a better chance of expansion appears to be in countries like India where there is currently just 43.5 million members but a population of over 1.2 billion people and Brazil with 37.9 million members. While the potential remains, there are censorship issues in India as well. In fact the Delhi high court has ordered many American internet companies such as Google, Yahoo and Facebook to develop a mechanism to remove objectionable material from their sites just days ago.
Expansion into other parts of the world could prove challenging to Facebook as well as it attempts to widen their broad appeal while contending with what they describe as political, social or economic instability, in addition to the risks with foreign jurisdictions with respect to privacy, regulatory requirements and enforcement, among others. Let’s also throw in inflation and foreign currency risk.
Still by viewing the charts presented in its prospectus, it appears that Facebook will have a great future. Hundreds of millions of people are already faithful, everyday users and advertisers are well aware of the enormous potential of reaching a vast audience on their website. Say you’re a movie producer and want to advertise your next summer’s blockbuster. The 2011 movie, Transformers: Dark of the Moon reached 65 million Facebook users in the US in a single day. The movie ended up being the second highest grossing movie last year. With that amount of clout, you can count on the company continuing its growth in revenue and the 1 billion membership mark in no time.
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