Want to know why the Initial Public Offering (IPO) of Facebook went from the greatest IPO in history to a debacle in less than 48 hours? Forget all you’ve read. Save your conspiracy theories for another day. The answer is starkly simple: Nobody has a clue what Facebook is actually worth because no one understands the mobile internet.
Not Mark Zuckerberg. Not the early investors who made huge profits from the IPO. Not Morgan Stanley, the primary underwriter. Certainly not the institutional and individual investors, many of whom were burned when the company shed nearly $20 billion in valuation from its $38 offering price. The blame game was immediate. Lead underwriter Morgan Stanley was blamed for overpricing the IPO and overestimating demand. NASDAQ was blamed for computer glitches. Rumours abounded that negative information about mobile ad revenues was provided to only a few select clients. Lawsuits popped up. Regulators started taking a look. From a purely financial perspective why anyone is surprised at Facebook’s price gyrations? Before the IPO, the estimates by “experts” ranged from a low of $28 to a high of $63. When “expert” opinion varies by a factor of 2.25, everyone is guessing—both high and low.
All the parties approached the sale exactly as they did during the Great Dot-Com Bubble and its subsequent collapse. It’s all instinct, emotion, and momentum. It’s 1999-2001 all over again. We never learn.
The blowback from bursting bubbles leads to a period of equally irrational undervaluation, an anti-bubble. Despite their financial success and excellent growth potential, Apple and Google have no higher price-earnings (P/E) ratios than a typical Dow Jones industrial firm. Microsoft, which churns out cash by the tens of billions of dollars, has a P/E ratio at half the Dow Jones norm. In contrast, Facebook has a P/E ratio that is five times higher than Google, even though Google’s earnings are ten times that of Facebook.
The huge gap between the valuations of haves and have-nots, coupled with the emotional state of investors, means that the outlook remains chaotic. The simple fact is that each successive wave of computing forces radical change. Something radically different has to happen to monetize the opportunity for the mobile internet. A sober review of Facebook provides a context for a more logical approach to monetization and therefore valuation. By extension, the logic applies to all stock prices for all mobile internet companies.
The good, Facebook is well positioned to be a revolutionary platform that could displace all other platforms, at least for a while, until it in turn is replaced by the next disruptive wave. It has 900 million customers and is growing rapidly worldwide. More than a place to post comments and photos, Facebook could become the internet portal for every mobile device as well as every desktop. Facebook’s potential user base is the six billion mobile subscribers on the planet. It could become by many orders of magnitude the most dominant platform for commerce in the history of the world.
However, the bad, Facebook’s entry into the mobile world is immature. Its revenue potential is far from decided. On the one hand, almost half of all Facebook users are mobile users, and they are twice as active as their desktop counterparts, pushing up Facebook’s average social networking time from 4.6 to 6.3 hours a month. Facebook is also the most popular free app on smartphones. On the other hand, Facebook’s mobile advertising revenues have significantly trailed the growth of its user base. This was the report that took the steam out of the IPO (and that apparently only a few clients saw in advance). Google’s mobile ad revenues have also trailed its desktop revenues. Nobody has figured out how to monetize the mobile internet. That’s the hard fact.
The mobile internet is not a mere extension of the desktop internet. It is a radical transformation of both technology and market. So far, everyone has simply ported their desktop approach over to mobile devices. This is a recipe for failure. If today’s leaders don’t understand the radical shift under way, they will be as obsolete as minicomputers and (potentially) PCs. Value creation on The Fifth Wave is defined by what we call Mobile Presence, based on the idea of providing users on the go with a unique, timely, fine-tuned and highly personal experience. This has nothing in common with a desktop experience.
Mobile Presence is not a technology but a radically new user experience. By definition, it will require a rich set of mature services targeted directly at individuals on the go. With it, people in motion will be able to work in concert with technology to streamline their communications, content, and commercial transactions. It will combine knowledge of your location, the time of day, your social and business interests and activities, your economic transactions, and your browsing and communication habits (all as voluntarily provided by you). Mobile Presence will provide exactly the information you need for your life or work on your mobile device at a specific time and place in a specific personal or business context.
The premise of Mobile Presence is that people should get meaning, not just data, from the mobile internet. Being hyper local, hyper social, hyper personal, and hyper timely, it will revolutionize advertising. If enough people of a certain demographic are nearby, for instance, a merchant can instantly send out a special promotion to them for the next hour. In a six-billion-person mobile market, hyper personalization means one-to-one marketing! This monetization method will dramatically raise response rates to ads.
Various companies are working on the technologies that will comprise Mobile Presence, but not a single company has a comprehensive vision for truly personalizing and optimizing the experience for mobile users. The company that does will own the future. Until then, stock prices are sheer guesswork—just like the 2001 bubble.
By Robert Marcus, CEO and Chairman of QuantumWave Capital
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