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Five Ways Facebook Is Not Like Google (And Why It Matters to IPO Buyers)

Mark Zuckerberg
Getty Images
Mark Zuckerberg

The Facebook IPO has surpassed Google as the biggest initial public share offering ever for an Internet company – but now the real race begins between the Silicon Valley rivals.

For shareholders it’s all about who makes money after the horses leave the starting gate.

Google is by far the most successful dotcom-era company to date, with sales last year of $38 billion, up tenfold from the 2004 offering, and profit last year of nearly $10 billion. Shareholders have done well: Its stock price has risen more than 600 percent since its first day’s trading.

Facebook comes to the line with a pedigree to match Google’s. Both companies were founded by twenty-something geniuses who created huge online followings. The billionaire entrepreneurs are fawned over by presidents and the media and their corporate campuses have become magnets for the best and brightest job seekers from around the world.

But there are some big differences, and these will matter much to investors going forward.

“We know Facebook is one of the best companies ever to go public – but we didn’t know that much about Google at the time of the IPO,” said Michael Pachter of Wedbush Securities.

In Google’s case, what investors didn’t know did not hurt them. In fact it helped, since things kept getting better.

Facebook might suffer from people knowing too much – the Oscar-winning movie “The Social Network” painted a dark picture of founder Mark Zuckerberg. And then there was ‘Zuck’s’ appearance in the hoody at a presentation to investors. “Wall Street is lukewarm about Zuckerberg; they are just not sure about him. The hoody didn’t help. When you ask for billions of dollars you should think of it as a job interview. And dress like it,” Pachter said. Google’s execs came to Wall Street sans neckties, but wearing suit jackets and leather shoes — superficial as such style comments might be to some.

Here are five key ones unrelated to men's fashion.

No 1-The CEO In the Hoody versus the Googleplex ‘Triumvirate.”

Facebook. College dropout Mark Zuckerberg is chairman, chief executive, visionary, and star of the show. He has it written into the IPO prospectus that he will name his successor when he makes his final Facebook status update. The share structure gives him absolute control for as long as he wants.

Googel CEO Eric Schmidt, and founders Larry Page and Sergey Brin
Justin Sullivan | Getty Images
Googel CEO Eric Schmidt, and founders Larry Page and Sergey Brin

Google. Founders Sergey Brin and Larry Page, Stanford PhD candidates, who had both turned 30 by the time of the IPO, were well connected to the Silicon Valley high-tech establishment, and they lured Eric Schmidt to become chief executive three years ahead of the IPO. A former CEO of Novell Inc and chief technology officer at the seminal tech giant Sun Microsystems, Schmidt brought with him instant credibility and a strong organizational track record. Still, he was young enough at 46 to connect with his partners. “We run Google as a triumvirate,” they said in their IPO document. “We tend to agree on everything."

What it might mean for shareholders. Wedbush’s Prachter has his doubts about the power vested in Zuckerberg and worries there will be no one to question his inevitable bad ideas. But Prechter recommends the stock, and one reason he does is that the headstrong CEO reminds him of another stubborn executive, Steve Jobs. The Apple founder created the world’s most valuable public company, though he was fired by Apple at one point and the company had a turbulent history before the reached the assured success of the iPhone era. Don’t look for such drama inside the social network’s boardroom with Zuckerberg so firmly entrenched.

No 2 - Facebook is not “part of the plumbing”

Facebook. The ‘social network’ has nearly a billion members – but its threads are more like gossamer than copper wiring. The level of engagement is massive but thin, and people are fickle. MySpace, Yahoo and AOL became virtual road kill when people decided to change favorites. But for now the glue that binds Facebook is the friend network itself. “People don’t want to switch off and lose all their friends,” Pachter said. That will add a measure of protection, but AOL and MySpace had high membership rolls that proved less than essential.

Google. With one million-plus servers, it is the nerve center of the global online economy, and everyone who makes money online needs to use it. It is the gateway to the Internet, and it is ‘virtually wired’ to everyone because it can measure and track traffic movements and engagement on millions of sites and billions of paid clicks each day.

What it might mean to shareholders. Google’s dominance in Internet commerce has attracted the attention of antitrust regulators around the world, and that is a concern for investors. Facebook is dominant in social media. But there is no law against being popular. People opt-in to the service, which is a key difference from the issues faced by a Google, or Microsoft before that, since Google's metrics and ad-linking software are essential for millions of publishers globally. By comparison, suing Facebook for antitrust would be like suing Seinfeld for dominating TV ratings all those years.

No 3 – Facebook IPO is valued much higher Google’s

Facebook. The pre-IPO valuation is around $100 billion. That is four times Google's valuation at the time it launched in 2004 — even though the revenue and earnings profiles at the time of the IPOs is very similar.

Giant businessman versus small businessmen
Mitchell Funk | Image Bank | Getty Images
Giant businessman versus small businessmen

Google. In Silicon Valley, where people knew the troika running Google, few doubted its value, and its secret search algorithm was legendary. Google sold itself through an auction system that allowed anyone to buy at the IPO if they named the right price, which limited the ‘scarcity value’ that causes many stocks to jump to ridiculous, unsupportable heights when they start trading. Fallout from the 2000 dotcom bubble also kept a lid on its valuation, a mere $27 billion.

What it might mean for shareholders. Google IPO shareholders now own a company valued at about $200 billion. Its shareholders were getting a piece of a company that had just strapped a money machine to the search engine with AdWord. Revenue has surged year after year. “Facebook already has made a lot of money for people – but it’s not clear how much is left for the public shareholders,” said Sam Hamadeh, chief executive officer of Privco, a private equity research firm. He cited a downturn in revenue in the first quarter at Facebook as a possible sign of a dramatically slowing in the growth rate, which he said could spell trouble for IPO investors.

4. Social media is a tough sell for big advertisers.

Photo: AMC

Facebook. Advertising provides much of the revenue for Facebook, and its audience metrics could foster targeted advertising. But in the confines of its walled social community it needs to be sensitive to audience privacy and the needs of advertisers, a difficult balance. National advertisers have been slow to go beyond Facebook fan sites. GM said it will stop advertising on the social network.

Google. In advertising, a plain vanilla wrapper works best. The Don Drapers of the world don’t put author signatures on their creative work — it is all about the customer. Google’s clear generic wrapper does not conflict, and increasingly big advertisers are putting their ad spend into Google.

What it might mean for shareholders. Google is far ahead in building a human sales force that can guide and reassure the big advertisers who decide the vast majority of ad spending. “Facebook’s growth so far has come from its self-service advertising,” said Hamadeh. “But when it’s large advertisers spending $20 million and $50 million, they want to know where the ads are running. They want to pre-screen TV shows. The big spenders, Coca Cola, Procter and Gamble, they want control over where their ads run. That is a problem for Facebook.”

5. Facebook owns its audience.

Facebook. With a billion members it is approaching the size of the Catholic Church as one of the biggest institutions in the world. With a following that large it will have immense power. Its user data alone will have huge value.

Crowd of Business Execs
Purstock | Getty Images
Crowd of Business Execs

Google. Google tried to crack the social media space with limited success. But it’s been able to move quickly in response to user preferences. It has been aggressive in pursuing mobile with its Android system, which shows promise.

What it might mean for shareholders. At its IPO, Google’s business model was just emerging. It has been helped by the ‘network effect,’ which says that the more people using a service the more valuable it gets. “Facebook hasn’t even started to do things like use search,” said Pachter. “They will do that soon. There is still a lot of upside.”

Hamadeh is more skeptical. “Google is the starting point to the Internet, and it grows in proportion to it use,” he said. “Facebook is a walled garden. That will limit its growth.”

Both companies rely on advertising dollars, and both will have major adjustments to make in adjusting to the mobile world, where ad space is shrunk dramatically. Both companies are moving aggressively to monetize the small screen. Google had years of unfettered growth without such a factor. As his company debuts, Zuckerberg faces the upheaval of this major technology shift. He says it is his No. 1 priority as his company goes public.