Is Facebook’s IPO the start of something, or the end?

Updated: If there’s one thing that has been sucking most of the oxygen out of Silicon Valley — and Wall Street too — over the past few months, it’s the growing frenzy over Facebook’s IPO filing, which is rumored to be taking place as early as today, and is expected to put a price tag as high as $100 billion on the giant social network (Update: The Facebook S-1 prospectus is here). But apart from the rampant speculation about the company’s ultimate valuation and who will benefit the most, the bigger question about the offering is whether it marks the beginning of a new era of growth for Facebook. Or is it just a massive cashing-out exercise, and a sign that this generation’s version of AOL (s aol) has finally peaked?
The fact that Facebook’s stock issue is expected to be one of the largest technology offerings of all time — as much as five times the size of Google’s (s goog) $1.7-billion initial share issue in 2004 — reinforces that this is a company that is already a behemoth in terms of its market power and sheer size. Not only does it have close to a billion active users, but it has more than 3,000 employees, and revenues that are estimated to be in the $4-billion range. The company already controls almost 30 percent of the display advertising business, giving it almost three times the share that Yahoo (s yhoo) has.

Facebook doesn’t really need to go public at all

For many technology companies that go public, the IPO is a necessary step on the road to scaling the business — an injection of financing that allows the company to grow, move into new markets, hire staff, etc. But Facebook has no real need for this kind of financing, if it ever did: The company has already raised several billion dollars worth of funding from Goldman Sachs, Russia’s Yuri Milner, China’s Li Ka-shing, and various syndicates of private venture capitalists, and is widely traded on private stock exchanges such as SecondMarket. It could certainly continue to do this without any trouble, given its ongoing growth, and at one point it looked like Facebook might never go public at all.
More than anything, what the Facebook IPO seems to represent is an opportunity for all of those initial backers — and many of the company’s own employees — to cash out. While many public stock offerings are orchestrated to allow this to happen, the sheer scale of Facebook’s IPO puts it in a category all by itself. And if the thousands of millionaires and dozens of billionaires who are created by the offering eventually put some of that windfall back into the startup scene, perhaps it will be worth it.

But surely some investors will stick with the company, to watch it grow even further? Undoubtedly some will — but that raises the $100-billion question for investors of any kind looking at this offering: How much bigger can Facebook possibly get? It already has a committed user base of close to one billion people, and it controls a massive chunk of the online display advertising market. Yes, both of those numbers are still growing, as users in other countries discover the network, and advertisers move their campaigns to Facebook in an attempt to benefit from social activity there. But how much growth is left?
Already, there are anecdotal signs that some are giving up on the network because it is simply too noisy. Younger users are said to be leaving for newer platforms like Twitter and Tumblr, in part because they want to avoid their parents — who are all on Facebook.

Where does Facebook look for growth now?

The biggest single challenge for Facebook is to find a way to generate more and more revenue from those billion users. Social games are well-established thanks to Zynga (s znga) and others, so there is little likelihood of a major moon shot coming from that segment of the market that will propel Facebook’s growth into the stratosphere. Could it become a bank, by building on and expanding its virtual currency, Facebook Credits? Perhaps. But the most obvious route to growth is to grab a larger share of the advertising market, and that’s what its “frictionless sharing” apps are designed to do.
Many advertisers, however, seem to be unconvinced — at least so far — that Facebook’s social advertising is worth paying very much for. The social network has a large share of the market, but its click-through rates and other metrics of engagement are still relatively low, and that is likely keeping a lot of money on the sidelines. Facebook has to prove that the benefits of targeting users through their social activity is worth more than their existing ads, and there are still skeptics who believe users who are sharing personal thoughts and behavior are fundamentally not interested in or receptive to traditional advertising.
All that comes on top of continued competition from Google, which already has a massive advertising base and the algorithms to parse search and behavior with equal precision — and is busy building a social platform that will give it both activity information on millions of users and a built-in identity structure for keeping those users in place. By comparison, Facebook’s walled garden could start looking even more like AOL than some believe it already does, and we all know how that movie ends.
Post and thumbnail photos courtesy of Flickr users Franco Boully and Rosaura Ochoa