Facebook’s horrible, stroke-of-genius IPO

By Felix Salmon
February 20, 2014

Two years ago, before Facebook went public, I wrote a feature for Wired with the title “For High Tech Companies, Going Public Sucks”. It was illustrated with this Mark Zuckerberg sadface:

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As it happened, going public did suck for Mark Zuckerberg — much more than even I thought that it would. But, like many things which look really horrible at the time, it turns out to have been the best thing that Zuckerberg could have done. Facebook, today, has a real chance of sticking around and dominating the world for many years to come — and it only has that chance because it went public when it did.

The reason is simple enough to be summed up in one word: mobile.

At the time of the Facebook IPO, 21 months ago, the markets knew full well what the biggest challenge facing Facebook was. The desktop product was wildly popular, but the mobile product wasn’t, and it was far from clear how Facebook could thrive in a world based around the smartphone. Zuckerberg had one job above all others: manage the transition to mobile, and do it as fast and as aggressively as possible.

And that’s exactly what he did.

By the time last quarter’s earnings came out, Facebook was getting 53% of its revenue from its 945,000,000 mobile users: nobody saw that coming at the time of the IPO. Facebook has monetized mobile better than any other website in the world, and its in-stream native ad units are impressively powerful. Brands aren’t buying them because they feel the need to be cool, they’re buying them because they work.

Zuckerberg, however, wasn’t satisfied with purely financial metrics. Mobile is a completely different world, and the move from desktop to mobile, for Facebook, had to be — and had to be seen to be, both internally and externally — as the central, company-defining strategy of the 2010s.

The technology world moves fast, and companies need to be able to change or die. If you change, then you can thrive: look at Netflix, for instance, a far cry from its DVDs-by-mail roots, or look at IBM, which has managed to pivot from making PCs to, um, whatever it is that it does now. (I’m a bit unclear on what that is, but the numbers speak for themselves: it made $16.5 billion of profits in the last 12 months, on revenues of $100 billion, and has an enterprise value of $220 billion; its share price is higher than it was even at the height of the dot-com bubble.) Look, most canonically, at Apple, which transitioned with spectacular success from making computers to making phones.

Or, alternatively, look at Microsoft.

Zuckerberg knew, circa Facebook’s IPO, that his company was not good at mobile: it didn’t have the problem solved. And he knew that asking his existing corps of engineers to turn their attention to mobile would probably not work. But the good news was that he was now running a public company, with lots of cash, and a highly-valued acquisition currency in the form of Facebook stock.

The world of mobile is in large part a lottery. The most successful products aren’t the best-made; they’re just the ones which managed to catch on, for whatever reason, and generate positive word of mouth. The perfect example: Flappy Bird, a game written in a single day, released with no fanfare onto the iOS app store, which went absolutely nowhere for over a year, before suddenly exploding in global popularity for basically no reason.

Facebook bought Instagram for $1 billion in 2012 not because the product was particularly great, but because the product was insanely popular. The same when he offered $3 billion for Snapchat. Sometimes, lightning strikes. And while Facebook is happy writing its own mobile apps in the hope that lightning will strike them, it knows better than to count on such a thing happening. If you want to be certain that hundreds of millions of people are using your mobile products, the only way to do that is to buy mobile products which hundreds of millions of people are using.

Facebook’s acquisition of WhatsApp sums up Zuckerberg’s strategy perfectly. WhatsApp is an ugly, clunky product with a juvenile name; there are dozens of prettier, smoother, more elegant mobile messaging apps out there. But, even more than Instagram, it’s also insanely popular: think of it as the Drudge Report of messaging apps. Facebook itself has never put much stock in elegance: its own site has always been pretty cluttered, mainly because it turns out that cluttered and ugly often works really well. (Look at any Chinese portal.) There is nothing intrinsic to the WhatsApp product which Facebook hasn’t already developed on its own. But WhatsApp has hundreds of millions of incredibly loyal users, all over the world, and that’s all that matters.

The price, of course, is high. But most of it is being paid in Facebook stock, with the cash component coming easily out of Facebook’s massive cash pile. Issuing Facebook stock, especially if doing so buys you the future, in terms of a young global user base, costs Zuckerberg effectively nothing: the share price is basically flat today, while it would surely have fallen much further had, say, Microsoft bought WhatsApp instead.

But that’s the difference between Facebook and Microsoft. Zuckerberg is the same generation as the people building today’s most popular mobile apps: he speaks their language, and he lives in the Bay Area, where they live, and — most importantly — he has complete control of his company, so if he decides that he wants to drop $19 billion on company with 55 employees, he can go ahead and do just that in a matter of days. At Microsoft, such a deal would probably be brought to some M&A person by a banker, and Microsoft would spend months kicking the tires, and there would be endless meetings about whether to do the deal and how much to pay, and the target company would get so frustrated over the course of the process that it would probably end up saying no regardless of what the eventual offer price was.

The WhatsApp acquisition is a statement by Zuckerberg that mobile matters more than money. He’s right about that. Without mobile, it doesn’t matter how much money Facebook has. If you’re asking whether Zuckerberg paid too much for WhatsApp, you’re asking the wrong question. Zuckerberg is sending a message, here, that Facebook will never stop in its attempt to dominate mobile — that no amount of money is too much. Zuckerberg has money — and, thanks to the IPO, he can even print money, if he wants, by issuing new Facebook stock. He’s playing large-stack poker, and he’s playing it in textbook manner. I, for one, wouldn’t want to be competing against him.

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