No-one should doubt the phenomenal financial success enjoyed by Mark Zuckerberg’s Facebook social media experiment.
Revenue has grown from $153 million in 2007 to £3.7 billion last year, virtually all from advertising. The company has earned profits in excess of $1 billion over the last three years alone. And it has accumulated cash balances and marketable securities of almost $4 billion.
Facebook has no obvious need to become a public company to raise more capital, so why share the fruits of its labours with anyone else?
In essence this IPO is about its founders and others banking a big capital gain on the company’s shares, and no-one should begrudge them that.
Key employees have share options that in reality can only be readily realised – and at the best price – if there is a public market in the company’s shares.
And there’s the little matter of a chunky tax bill that founder Mark Zuckerberg will have to pay on the exercise of outstanding stock options.
So how sustainable is the Facebook phenomenon?
As a medium it enjoys a few of the attributes that have made some controlled circulation publications so successful with advertisers in the past. It has an audience that is clearly identified, segmented and spoken to directly. What more could an advertiser ask for?
Reader interest in the ads
The Facebook formula relies on its users to introduce new members to its digital database, something which they appear more than happy to do given that communication with "friends" is the single most useful feature of the product.
That, and the ability to analyse the personalities and tastes of its members, is what has made Facebook the financial success it has become.
But knowing a lot about your audience is only of value if that audience wants to listen. To that extent, Facebook faces the same threat that may eventually erode some of the perceived benefits on offer from LinkedIn.
Compared with a controlled circulation printed publication, there is a very obvious distinction. The most successful of the "old fashioned" printed publications were those that specialised in a single market – like accountants or doctors.
Those publications were delivered direct to a clearly defined and relevant audience, offering regular exposure of relevant editorial material and job vacancies.
With mass market digital media, the audience can be segmented into groups that are likely to be interested in the advertiser’s wares, but what assurance is there that the target audience will be viewing or, more important still, be in a fame of mind to be interested?
Doctors reading a medical magazine will be thinking about medicine at the time, so pharmaceutical advertisements have some chance of connecting.
But there is no such certainty that a group of doctors identified from the Facebook database will actually visit the publication, let alone be in a frame of mind to consider a pharmaceutical product if they do.
Of course, Facebook will doubtless retort that its advertisers are more likely to be selling consumer and commercial products of wider interest.
But that leaves unanswered the question of whether someone on the database will actually have cause to visit the site when an advertiser is appearing there.
The ultimate test, as always, will lie in the audience analysis that Facebook can provide and, equally importantly, that independent researchers can corroborate and amplify.
It may be more than a coincidence that the company’s spend on marketing has begun to creep up to about 15% of net revenue from 12.4% in 2010. Keeping the ever-increasing Facebook audience interested in the advertisements could prove to be a hard and costly thing to do.
But at least Facebook’s marketing costs are consuming a much smaller percentage of revenue than LinkedIn has experienced.
Healthy profits seem assured for some time yet, even if they don’t justify the hyped up share price that is likely to accompany Facebook’s stock market debut.
Bob Willott is editor of