Daniel Schlagwein

After the first full day of trading, Facebook shares have lost over 10% off their issue price as the enthusiasm for the social network giant has turned to scepticism, following its lacklustre initial public offering.

Why is this?

Probably over worry that users might turn to other social networks if Facebook tries to capitalise on them too much.

Facebook went public last Friday with what was forecast to be a big-bang IPO of shares that valued the company at more than US$104 billion. Alas the bang turned into a fizzle.

The Facebook IPO is a case of pricing the distant future of company based on sheer potential — and a perceived one at that.  Investors fear that Facebook will never realise its full potential. The worry is that its users – or friends – might turn to other networks if Facebook tries to capitalise on them too much. Other social networks—Friendster, MySpace or the VZ network in Germany—vanished quickly. With Wall Street in a bearish mood, it’s clear it didn’t want to take a punt on something that might not last the course.

The stock closed at $US34.03 yesterday, down 11% for the day and well below the $US38 initial public offering price

I see three major concerns.

Firstly, Google could be in a position to attack Facebook. This may seem optimistic; after all Google Buzz failed, and Google+ is only moderately successful for now. However, Google has a better business model, the cash and the clout to get a new competing network up and running: all it has to do is get enough people to like it.

There are also not-for-profit developers, who are giving established corporations a run for their money.

Open source software can move the market in unexpected ways – look at Firefox for example, which is now a serious competitor for Internet Explorer. There are likely to be new developments in the social network space. An open source system, or an otherwise non-business driven social network might emerge. Never discount software developers creating new tools for free – and that could seriously impact on Facebook.

Finally, the EU and other regimes are not shy about taking on monopolies. Right now there are legitimate concerns about how legislative systems will deal with a monopolist Facebook.

However Facebook is an excellent example of how small start-ups can become huge. I consider Facebook to be in an excellent position to benefit from the social-centric web and I would expect much social commerce to be increasingly built on Facebook. Current developments remind me of the concerns with Google’s IPO in 2004. However, the Google IPO stock price was $85 on the first day, and now it is above $600. It could all pan out for Facebook, but right now it is pure speculation to provide any estimate on Facebook’s “real value”. Investing in Facebook is a gamble.

Daniel Schlagwein is a lecturer at Australian School of Business