Bloomberg News

Facebook Cites Google+ With Mobile Shift Among Potential Risks

February 08, 2012

Feb. 2 (Bloomberg) -- Facebook Inc., the social network that filed for an initial public offering yesterday, listed rivalry with Google Inc., regulatory scrutiny, hacker attacks and the shift to mobile technology among the risks it faces.

Facebook’s competition with Google, Twitter Inc. and other social-networking providers could impede growth, 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,” the company said.

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.

The company also 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 further cautioned that key mobile devices, such as Apple Inc.’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 its own Google+ more aggressively -- Facebook’s growth could be jeopardized.

Unforeseen Threats

Bigger pitfalls could yet emerge, said Kevin Landis, the portfolio manager for the Firsthand Technology Value Fund, which holds Facebook shares. Google, for instance, couldn’t have foreseen the emergence of Facebook in 2004, when it went public.

“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. Facebook was founded in 2004.

Facebook also 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.”

Dependent on Zynga

Another risk: Facebook relies on Zynga Inc. for 12 percent of its revenue, according to the filing. San Francisco-based Zynga 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.

“If we are unable to successfully maintain this relationship, our financial results could be harmed,” Facebook said of Zynga.

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.

Regulatory Constraints

“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.

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.

Hacker Attacks

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 has 845 million active users. That compares with more than 90 million for Google+, which started last year.

--With assistance from Peter Burrows and Adam Satariano in San Francisco. Editors: Nick Turner, Dan Reichl

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


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