M+E Daily

What Will Facebook’s IPO Mean for Media?

Advertising and app payments remain Facebook’s primary market opportunities, according to its Feb. 1 IPO filing. But there’s no question that growth in both of those markets is premised on content distribution.

Even as it counts 845 million active users, audience growth is one of Facebook’s biggest challenges. “The low-hanging fruit of the Western developed world has already been penetrated to a large extent,” says Wedbush Securities analyst Michael Pachter (via Reuters). “It’s just kind of obvious that they’re not going to ever get every single person that lives on the planet.”

The $3.15 billion that Facebook says it earned in advertising revenue last year was on the low end of Wall Street’s initial expectations. That means Facebook, as a public company, will be under pressure to both grow its audience and further engage its current user base.

While some are not expecting Facebook, flush with cash from its IPO, to make an acquisition play for a content distributor like Netflix or Spotify (see Fast Company), others expect that movies, TV episodes, and music will have to be a bigger part of Facebook’s content mix going forward (see Reuters).

The bulk of Facebook’s current content, of course, is user-generated. “To provide each user with a personalized Facebook experience, we must process and analyze a vast and growing amount of content shared by our users, developers, and advertisers and surface the most relevant content in real time. For example, loading a user’s home page typically requires accessing hundreds of servers, processing tens of thousands of individual pieces of data, and delivering the information selected in less than one second,” Facebook says in its preliminary prospectus.

The company touts its proprietary content optimization and delivery system, as well as a portfolio of data storage, management, and serving technologies — all of which handle more than 100 petabytes of photos and videos.

Advertising around all of that content accounted for 84 percent of Facebook’s total 2011 revenues of $3.7 billion. The balance of 2011 revenue came from payments and other fees that Facebook collects when users purchase digital goods from app developers on the platform.

Facebook’s $557 million in payment and fee revenue last year was generated “almost exclusively from games” — namely, virtual goods sold within Zynga titles (such as FarmVille). The company says it could seek to diversify its payment revenue base beyond game developers, for whom usage of the payments infrastructure is mandatory. One growth prospect could be demanding a bigger cut from movie rentals. Even as more major studios test the social network as a direct-to-consumer distribution platform, in the most recent market test, Lionsgate notably eschewed Facebook Credits as currency, favoring PayPal and credit card payments instead.