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Facebook finds few friends among investors


It didn't take long for tech industry observers to issue a verdict on Facebook's first quarter as a public company.

"The jury is in: Facebook is not and will not be a second Google," said Karsten Weide, vice-president of media and entertainment at IDC, the research firm.

"To be clear, Facebook is making a lot of money, it is growing fast and it is a viable business. But unless the company takes digital marketing to a whole new qualitative level, for instance, by making social advertising work, or by leveraging the potential of mobile ads, a second Google it will not be."

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Facebook's first quarterly earnings report as a public company, delivered Thursday, was a bizarre event. The social network met analyst expectations, but saw its stock price tumble anyway. The primary concern for investors: Facebook's growth rates, while good, were undoubtedly slowing down.

The company that went public in a storm of hype and high expectations just three months ago has all but run out of both. Instead, Facebook faces the daunting challenge of placating investors who bought in to the company's high valuation, and are looking for results.

In addition, Facebook is caught in a difficult situation for a tech firm. It is directly competing with two companies that represent, respectively, a guide to its present and its future as a public company: Google and Twitter.

After months of anticipation, Facebook's IPO in May was, by most accounts, a disappointment. A series of technical glitches marred early trading, and the banks supporting the deal eventually had to step in and buy shares just to keep Facebook from posting an opening-day share-price loss.

Coincidentally, Google's first day of trading in August of 2004 was also marred by glitches. Confusion reigned after one brokerage firm jumped the gun and posted trades too early. Google had already reduced the opening share price in the days ahead of the IPO, and it seemed the first day of trading would not go well.

Nonetheless, if you bought Google shares at the IPO price, you were sitting on an 18-per-cent gain at the end of the first day of trading. In Facebook's case, the first-day percentage gain was nil.

And Google's first earnings announcement went much better than Facebook's. By October, when the search engine released its third-quarter numbers, Google's share price had risen almost 80 per cent from the day of the IPO in August. When Facebook reported its second-quarter earnings on Thursday, its stock price had dropped about 30 per cent from the opening day in May.

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Like Facebook, Google posted strong numbers during its first quarterly earnings report. The search engine more than doubled its revenue and profit from the same period a year earlier. Unlike Facebook, Google easily beat analyst expectations, and saw its share price pop more than 5 per cent in after-hours trading. Facebook, on the other hand, saw its share price drop as much as 11 per cent after it posted results.

There are differences between the two companies' early experiences on the public market, including intensity of competition in the tech industry, the surge of mobile device usage in recent years, and the state of the global economy. But both companies hit the market at moments when the general tech IPO market was experiencing a slump.

If Facebook's present should resemble Google's early days as a public company, its future – if it is to generate the higher growth rates investors are demanding – should look a lot like Twitter.

The microblogging site is the one social media IPO that's likely to generate mass investor interest any time soon, after numerous tech IPO duds in recent months.

"Twitter is the one where we could see the same type of frenzy, because Twitter has already figured out mobile," said Neal Bearse, associate director of marketing at Queen's University school of business.

There's no timeline for when, or even if, the micro-blogging site will go public. Unlike Facebook, which started out as a service aimed solely at desktop computers, Twitter was built primarily for users to post updates through the text-message function on their mobile phones. Years later, as smartphone and tablet use surges, Twitter's mobile-first upbringing is proving hugely useful.

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"Facebook's share of mobile users is high. Twitter's share of mobile users, as a percentage, is even higher," said Kunal Gupta, CEO of app developer Polar Mobile. "They're motivated more to generate mobile revenue. More than half of Twitter's revenue is from mobile today, that's not the case with Facebook."

As Mr. Gupta notes, Facebook has taken some steps to build more innovative advertising products, such as "sponsored stories" from advertisers that appear in the main section of a user's screen (Twitter's sponsored Tweets work much the same way). The social network's success in the mobile space, which will become vital as users spend more and more time on their smartphones, likely depends on coming up with similar products for smaller-screen ads.

Currently, there are two major problems with mobile advertising. The first is size – it's difficult to tell a compelling story in an ad that's only an inch wide. Even if users click on an ad, the destination they're taken to often isn't all that interesting, in large part because advertisers are reluctant to build high-quality mobile websites for all device types, from BlackBerrys to iPads. In addition, some Web standards (namely, Flash animations) don't work on some devices (namely, Apple's mobile products).

But by leveraging its massive user base and building a universal platform for mobile ads, Facebook might be able to play a lucrative role as mobile advertising's middleman.

"They have enough scale, they have 500 million mobile users," said Mr. Gupta. "They can create their own standards, they just need to keep innovating."

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