Facebook Cites Google+, Mobile Among Risks

By Brian Womack - Feb 2, 2012 8:03 AM GMT+0700
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In this file photo the Facebook Inc. logo is reflected in the eyeglasses of a user in this arranged photo in San Francisco. Photographer: David Paul Morris/Bloomberg

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Feb. 2 (Bloomberg) -- Gary Rieschel, founder and managing director of Shanghai-based Qiming Venture Partners, talks about Facebook Inc.'s planned initial public offering and the social-networking website's business prospects for the China market. Facebook filed to raise $5 billion in what would be the largest Internet IPO on record. Rieschel speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

Facebook Inc., the social-networking giant that filed for an initial public offering today, cited Google (GOOG)+ competition, regulatory scrutiny, hacker attacks and the shift to mobile technology among the stock’s potential risks.

Facebook is vying with Google+ and other Google Inc. sites in the social-networking market, along with regional rivals, the company said in the risk-factors section of its filing. Facebook also said it would face competition in China if it manages to gain access to that market, where it’s currently restricted.

“Certain competitors, including Google, could use strong or dominant positions in one or more markets to gain competitive advantage against us in areas where we operate,” Facebook said. Their tactics may include “integrating competing social- networking platforms or features into products they control.”

Facebook, the world’s biggest social-networking service, has attracted more rivals as its popularity among users and advertisers soars. The company said it faces “significant competition” in almost every aspect of its business.

Discerning the real threats can be difficult in an S-1 filing, said Kevin Landis, the portfolio manager for the Firsthand Technology Value Fund, which includes Facebook shares. Some dangers may not have emerged yet, he said.

“Let me put it this way: If you go back to Google’s S-1 in their risk factors, there’s no mention of Facebook,” Landis said.

Mobile Threats

The company cited concerns about its mobile strategy. Almost all of its revenue comes from ads delivered to computers, not phones and tablets. Facebook’s mobile software currently generates no “meaningful revenue,” the Menlo Park, California- based company said.

Facebook also cautioned that key mobile devices, such as Apple Inc. (AAPL)’s iOS products and gadgets running Google’s Android software, may not feature Facebook in the future. If either of these companies gives preference to another social network -- say, if Google promotes Google+ more aggressively -- it could limit Facebook’s growth.

The company has considered entering China, which would bring its own challenges. The country has censorship laws that have kept Facebook and other social-media companies, including Twitter Inc. and Google’s YouTube, from operating there.

“We continue to evaluate entering China,” Facebook said. “China is a large potential market for Facebook, but users are generally restricted from accessing Facebook from China. We do not know if we will be able to find an approach to managing content and information that will be acceptable to us and to the Chinese government.”

Zynga Reliance

Another risk: Facebook relies on Zynga Inc. (ZNGA) for 12 percent of its revenue, according to the filing. San Francisco-based Zynga (ZNGA) is the biggest developer of Facebook games, including “CityVille” and “Texas HoldEm.”

The revenue comes from Zynga’s sales of virtual goods and from direct advertising purchased by Zynga. In addition, Zynga produces a “significant number” of pages on which Facebook displays ads. The dependence goes both ways. Zynga gets more than 90 percent of its revenue from the social network.

Facebook also said it faces pressure from governmental bodies. It’s possible that a regulatory inquiry might lead to changes to policies or practices, the company said.

“Violation of existing or future regulatory orders or consent decrees could subject us to substantial monetary fines and other penalties that could negatively affect our financial condition and results of operations,” according to the filing.

Privacy Complaints

Facebook agreed last year to settle complaints by the Federal Trade Commission that it failed to protect users’ privacy or disclose how their data could be used. The proposed 20-year agreement would require Facebook to get clear consent from users before sharing material posted under earlier, more restrictive terms, and it would include independent reviews of Facebook’s privacy practices.

The U.S. Securities and Exchange Commission, meanwhile, is probing transactions involving shares of closely held companies, including Facebook. Secondary exchanges, such as SecondMarket Inc. and SharesPost Inc., have been used to buy and sell Facebook stock ahead of the IPO.

“We have received both formal and informal requests for information from the staff of the SEC and we have been fully cooperating with the staff,” the company said in the filing.

The company also could suffer if its users’ data is compromised by attacks from outsiders.

“Any failure to maintain performance, reliability, security, and availability of our products and technical infrastructure to the satisfaction of our users may harm our reputation and our ability to retain existing users and attract new users,” Facebook said.

The media could hurt Facebook as well, by portraying its privacy and product changes in a negative light. The company received a “high degree of media coverage,” Facebook said.

The company, founded in 2004, has 845 million active users. That compares with over 90 million for Google+, which started last year.

To contact the reporter on this story: Brian Womack in San Francisco at Bwomack1@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net