The company responsible for the most popular social network on the Web took its first step toward going public on Wednesday. Facebook filed a 200-page regulatory document with the Securities and Exchange Commission as it prepares for an initial public offering in the spring.
Even though investors have been clamouring to get a piece of Facebook for years, the company's regulatory filing reveals a number of previously undisclosed details about its inner workings – and not all of them good.
Looking over the filing reveals a number of challenges that will ultimately determine whether Facebook continues to dominate the social Web, or becomes this decade's MySpace.
1: Mobile
More than half of Facebook's 845 million monthly active users have also used the company's various mobile products, such as Facebook apps for the iPhone, BlackBerry and Android-powered phones. In of itself, that's positive news for the company, given that social media users are increasingly moving from desktops and laptops to smartphones and tablets.
The problem is, Facebook derives the vast majority of its revenue from third-party ads. And when it comes to its mobile offerings, the company has no ad strategy to speak of.
“Growth in use of Facebook through our mobile products, where we do not currently display ads, as a substitute for use on personal computers may negatively affect our revenue and financial results,” the company stated in its regulatory filings.
Once it goes public, Facebook will likely come under significant investor pressure to start monetizing its mobile products, most likely through the inclusion of ads. However mobile advertising is a different beast, and the company will have a hard time simply recreating its desktop Web ad strategy on the smaller screen.
2: China
In one of the fastest-growing markets on Earth, access to Facebook is still severely restricted. Chinese Internet users still face ubiquitous censorship, and Facebook has so far not tried to work with Beijing to deliver even a watered-down version of the social network to the country.
Facebook will likely find China's 450 million Internet users too alluring a market to pass up. However, in its regulatory filing Facebook mentions three other social networks – Renren, Sina, and Tencent – that are already well-established in China. Because social network users tend to join networks their friends have already joined, a head-start in a country can be hugely beneficial.
In addition to the established players, Facebook will have to deal with the well-known complexities of the Chinese markets. These include heavy government regulation, censorship requirements and potential hacking (which at one point forced Google to abandon much of its presence in the country). Facebook’s filing says the company is still evaluating whether to give China a shot. “However, this market has substantial legal and regulatory complexities that have prevented our entry into China to date.”
3: Diversification
For all its phenomenal growth, Facebook is, at its heart, a company that makes money predominantly off advertising. Like Google GOOG-Q, Facebook derives most of its revenue from selling ads to third-parties on its site. Three years ago, 98 per cent of Facebook's revenue came from ads. Last year, that number dropped to 85 per cent, largely because the company began taking advantage of payment revenue from the many social games that run on the Facebook platform.
But even that new source of revenue is lopsided. Virtually all of Facebook's revenue from games comes from Zynga, the massive social games maker and creator of such hit titles as FarmVille. In fact, Zynga accounted for 12 per cent of Facebook's revenue last year – such a significant share that Facebook included the possibility of a deteriorating relationship with the company as a significant risk factor in its regulatory filing.
