Facebook IPO bad news for cellcos: consultant

05 Apr 2012

If you thought Facebook’s OTT business model was bad news for cellcos, just wait until their IPO kicks in.

That’s the warning from London-based M&A advisory firm Magister Advisors, which said Wednesday that Facebook’s IPO is “about the worst thing that could happen to network operators”.

"They're supporting the end users' social networking habits, but they see very little, if any, commercial benefit and the downside risks are significant,” said Magister MD Victor Basta. "Facebook is a textbook example of an over-the-top technology and is effectively turning mobile network operators into digital drug mules."

Digital drug mules!

Dithering over Facebook’s OTT model (or any other OTT service), its potential impact on operator revenues – particularly SMS – and the fact that cellcos technically are not part of the Facebook ecosystem is nothing new. But Facebook’s planned IPO will make an already grim situation worse, claims Basta, because it will give Facebook less incentive to share revenues with operators:

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

Personally, while I’m sure Facebook will be under tremendous pressure from Wall Street to hit targets once it goes public, I can’t see how that would sour Facebook’s plans to work more closely with operators.

For one thing, from a sheer revenue-generating POV, Facebook doesn’t need to cooperate with cellcos now, IPO or not, because it makes its money from advertisers. The IPO doesn’t change that. Facebook will be just as OTT as before, and cellcos will be out of that loop.

Meanwhile, Facebook’s mobile strategy has been a little more than making “recent noises about sharing some revenue with operators”. For example, one of Facebook’s motivations for working closer with cellcos is to get access to their billing APIs. At MWC in February, Facebook CTO Bret Taylor said Facebook wants to work with operator billing to improve things like mobile payments for buying objects in the middle of a mobile game.

And Facebook isn't the only OTT player keen on building better operator relationships. A number of big-name OTT players are reaching out to cellcos as part of their mobile strategies precisely because they understand that a strictly OTT business model only gets them so far. They’re not partnering with cellcos just to mollify them about SMS losses and free riders – they’re doing it because they’re getting something out of it that they can’t get on their own.

Obviously the relationships are more complicated than that, and it's early days, so just to what extent cellcos can monetize these new relationships remains to be seen. But I can’t see how Facebook’s IPO will make much difference in that regard.

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