Facebook IPO Bad News for Carriers

Facebook’s IPO is about the worst thing that could happen to (mobile) network operators. That’s the unequivocal view of M&A advisory firm, Magister Advisors.

The company says that Facebook’s over-the-top business model creates significant strategic and revenue risks for mobile operators, noting that, according to its pre-IPO filing, Facebook has more than 400m users accessing the service on mobile devices, up from 70m three years ago. Yet despite the growing commercial importance and subscriber utility of mobile social networking, mobile operators are missing out on significant revenue opportunities because they sit outside the Facebook ecosystem, the firm says.Worse still, Facebook’s messaging services, along with those from other over-the-top providers such as WhatsApp, are eating into operators’ valuable SMS traffic.

“Facebook’s IPO is about the worst thing that could happen to network operators,” says Magister Advisors managing director, Victor Basta. “They’re supporting the end users’ social networking habits, but they see very little, if any, commercial benefit and the downside risks are significant. “Facebook is a textbook example of an over-the-top technology, and is effectively turning mobile network operators into digital drug mules. The fundamental challenge for network operators will be finding a way of becoming part of the Facebook ecosystem, rather than simply external enablers.”

Facebook has made recent noises about sharing some revenue with operators, such as payments income from users playing games on Facebook. The company notes, however, that Facebook will be under intense pressure after its IPO to justify its likely $100bn valuation. With revenues below $4bn, it will have to make rapid progress to achieve the $30bn in revenues that would support that valuation.

In Magister Advisors’ view, much of the required additional revenue has to come from its increasingly important mobile channel, making it more difficult to share significant revenue with operators. So while Facebook wants to position itself as more ‘operator-friendly’ than Google or Apple, the harsh reality of Wall Street’s quarterly expectations will drive them to maximize revenue from mobile, at the operators’ expense.

The firm concludes by saying that mobile operators will play a crucial role in enabling Facebook to monetize users on the move, adding that the challenge for them will be leveraging the power of that position by finding a way to work within the ecosystem, rather than ‘giving it away for free’ while helping Facebook grow in value.