Facebook's Sponsored Stories Show How Much Subscribers Are REALLY Worth
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For Facebook (NASDAQ: FB), I call this time a period when everything that can go wrong will go wrong. The latest event affects the social media company’s Sponsored Stories product, which is an advertising tool that is key to it being able to make money off of the increasing number of subscribers who log on to the site via mobile devices.
Last week, U.S. District Judge Richard Seeborg in San Francisco blocked the $20 million settlement Facebook had agreed to pay to settle a class-action lawsuit brought by five people over Sponsored Stories. The plaintiffs were peeved about how Facebook was using what they deemed their private information with the advertising product. Up to 100 million members could have joined the lawsuit.
The judge didn’t take issue with whether or not Facebook was violating users’ privacy with the ad product. Instead, he questioned why the plantiffs had agreed to such a low amount. Also baffling to me, and pointed out by Judge Seeborg, is that the plantiffs will get no money, while the attorneys will get $10 million. The rest will go to charity causes chosen by the plantiffs.
It’s estimated that the value of Facebook members is at least $100 million. Considering this amount is significantly more than the $20 million agreed to, the judge summed it up as not making sense. He put the settlement on ice until he can figure out how to rule.
In addition to the $20 million for everybody but the plantiffs, the settlement calls for Facebook to make it clearer to its subscribers that their “liking” a service, product or page could result in them being a part of a Facebook ad. No opting out either; subscribers relinquish their rights to not participate when they give thumb up to (“like”) anything that can be sold. In essence, they may unwittingly become spokespersons, without the perks that usually come with such promotions, i.e. money.
In the meantime, Sponsored Stories still run in the newsfeeds of many of its subscribers. Considering the ad product stands to generate $1 million a day, or $365 million a year, with half of that coming from mobile users, who could blame the company for not abandoning it?
It’s clear that this ad product is important to Facebook. The company said as much during the conference call when it tried to explain the slowdown of its revenue growth in the second quarter.
During that call, CEO Mark Zuckerberg and COO Sheryl Sandberg steered clear of discussing the outrage expressed by many unhappy subscribers over Sponsored Stories. Instead, the two talked about how the ad product would boost earnings, with Sandberg calling the ad product the cornerstone of its mobile monetization strategy.
The judge’s blocking of the settlement comes on the heels of several other negatives that have affected Facebook since its botched IPO in May. At that the time, it had a $100 billion market valuation. That has dwindled to about $50 million, which is still nothing to sneeze at. In fact, The Wall Street Journal has reported that the stock could be placed on the NASDAQ 100 because of its still sizable market valuation.
Also aggravating Facebook’s stock is the expiration of its lockup periods. The wave of shares, about $261 million, began entering the market last week. Since then, the stock has sunk and is trading at all-time lows. Before all is said and done, potentially $2 billion, or 60% more Facebook shares, could flood into the market.
The reason monetizing mobile users is so important is partly due to more people using smartphones and tablets to access websites. Unfortunately, that has led to a drop off in display ads. As I wrote last month, Facebook made an impressive run to the top of the list in terms of sales from display advertising business, outdoing Yahoo (NASDAQ: YHOO), which had held the top spot. It also did better than Microsoft and AOL.
However, now Google (NASDAQ: GOOG) is set to surpass Facebook by next year. According to eMarketer, Facebook had 14% of the market in 2011 with $1.73 billion in sales. Google’s share totaled 13.8% with $1.71 billion. Facebook continues to dominate this year, but next year, Google is expected to have 20% of the market, while Facebook will have about 18% of it. eMarketer expects the sales to be $3.68 billion and $3.29 billion, respectively. So you can see how quickly things can change when it comes to this huge revenue generator, and why Facebook is shifting to mobile users to regain revenues lost through display advertising.
For Facebook and investors, this is unchartered territory. Facebook’s IPO was one of the most anticipated in the history of the stock market. Now that it is failing to live up to so much of the hype, Facebook’s stock is suffering. Long-term investors who have the patience and confidence in this social media giant may prevail.
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