Do investors really “like” Facebook?

Man is a social being and social networking is inherent in the very human culture. With the onset of the era of information technology, the social networking sites have transformed the way the world communicates. Facebook, being one of them, founded in the Harvard dorm room in the year 2004, is an astonishing success as a social networking site. With over 900 million users, the mere eight-year old website has entered into every household, influencing all age groups. Given the number of users, Facebook, if considered as a country, in terms of population would be the third largest in the world!

Recently, the news that caught the eye of the global media was the floatation of initial public offering (IPO) by the company, on May, the 18^th, when the company went from being private to public and started offering its shares at the Nasdaq stock exchange. The company’s IPO smashed all records of trading volumes by selling 565 million shares at an offer price of $38. This gave the site a valuation of $104 billion, making it the third largest offering in the US history and rating it as bigger than the likes of Google and Apple.

The stocks of the company, which on one hand promised to create millionaires, on the other made analysts sceptical about the extent to which such a valuation was worth, and quite justifiably so. The Facebook IPO has since been the second worst performing IPO, out of the 83 IPOs which have started trading so far, this year. The share prices have shown a continuous downdraft, pointing to the investor fears about the rate of slowdown in the revenues of the company. It saw a 32% year-over-year increase in revenue in the second quarter of the present year, as compared to a rise of 45% in the first quarter. This growth might sound quite convincing, but it is just a fraction of what the company witnessed in the first quarter of the year 2011 and 2010 i.e. 88% and 154% respectively.

Facebook, for its revenues, relies mostly on advertising and certain non-advertising sources such as payments for games on the website. Advertising, accounting for around 84% of the revenues, is one area where the company has got tremendous potential. The key features which make Facebook a unique destination for advertisers are, firstly, its massive reach and secondly, its ability to target ads with relevance, based on the information which users share with the website. But, with the increasing use of smartphones and the Facebook’s app to access the site, the continuation of effective advertising revenue is too in doubt. Thus, although the user base of the website is fast growing, the rate of increase in the mobile ads is slower than that of the mobile users. Offering and integrating advertising on small screens is a difficult task and the company needs to gear up and implement strategies to monetize the mobile users, in order to fully exploit the money-making opportunities. In the mobile battle, however, the task is far more challenging for Facebook, with the presence of players such as Google and Apple, which having their own operating system and hardware, lie far ahead of the pack. Ceding control to such companies could prove to be way too costly for Facebook. As a matter of fact, according to certain researchers, Google ads get a 0.4% click-through rate while those of Facebook get a meagre 0.05 %, which implies that the Google ads are ten times more effective than the Facebook ads. Also, the ARPU(Average Revenue Per User), which is a critical measure of the effectiveness of the site in converting its members into revenue producing customers, showed only a 6% year-over-year increase in the first quarter this year and in-fact a decline of 12% from the fourth quarter last year.

Apart from these above mentioned challenges, there are other potential risks which lie ahead of the company, some of them being regulatory scrutiny, hacker attacks and rivals such as Google+. Also, the website would face tremendous competition in China, if it manages to gain access to that market, where it is currently blocked.

Thus, in a nutshell, Facebook has clearly been a victim of hype and inflated expectations. Given its stature among the social networking sites, people expect it to completely revolutionize advertising and maintain a blistering pace of growth. This is still a definite possibility for the company, if it rolls up its sleeves and makes a dramatic move, causing investors to “share” its vision and make them hit the “like” button.

GST- the Bandwagon, gaining pace, ushering in a Paradigm Shift!

Goods and Services Tax, the new tax reform on cards, promises to bring the economy at par with other developed nations.

Tax policies in an economy play a major role through their impact on both efficiency and equity. A good tax system keeps in view, issues like equitable distribution of income and efficient allocation of resources, at the same time, generating tax revenues to support public services and infrastructure development. There have been various tax reforms in our country, from time to time, with the objective of improving efficiency, enhancing simplicity and ensuring compliance.

In a developing economy like ours, where resources are scarce and limited, the trade-offs between various policy objectives need to be handled judiciously. The various policy instruments and taxation policies should be such that they maximize economic efficiency and minimise distortions in effective resource allocation, capital formation and international trade.

With regard to equity, it has been widely acclaimed that horizontal equity is preferred over vertical equity. While vertical equity is based on high marginal rates of taxation in both direct and indirect taxes, horizontal equity relies on simple and transparent broad-based taxes, with low variance with respect to tax rate. This led India to make a shift in its taxation policies during the tax reform of nineties, when the tax regime relied heavily on indirect taxes. It exerted an adverse impact on prices through cascading effect and also on various sectors of production by reducing their competitiveness. This phenomenon significantly contributed to the loss of income and welfare in the economy.

The introduction of CENVAT at the central level (2002-03) and VAT at the state level (2004-05) helped overcome some of these challenges by removing the system of multiple taxation to some extent and also leading to high growth in the tax revenue. However, despite the success of VAT, there are certain shortcomings in the structure, both at the central and state levels, which the dual GST taxation system seeks to overcome.

The introduction of GST at the central level will be more comprehensive by inclusion of more indirect central taxes which have been left out by CENVAT. It would also integrate goods and service taxes for the purpose of offset relief and at the same time may also lead to revenue gain for the centre through widening of dealer base by capturing value addition in the distributive trade. Also, in the existing state-level VAT structure, there are a few loopholes. There are several indirect taxes on goods and services, which have not been included in the VAT scheme, for instance, entertainment tax, luxury tax etc. Moreover, there also exists cascading effect to some extent, within the existing structure, as the CENVAT load on goods remains included in the value of the goods to be taxed under state VAT. Additionally, there should be removal of cascading effect of service tax and integration of VAT on goods with tax on services at the state level as well.

GST provides a solution to all the above problems by resting additional powers in the hands of the states for the levy of taxation of services and by introducing a comprehensive system of offset relief, including offset for cascading burden of CENVAT and service taxes.

Furthermore, the system of GST seeks to increase compliance and reduce prices to some extent as both the central and the state taxes will be collected at the point of sale and will be charged on the manufacturing cost.

Thus, GST will not only redistribute the burden of taxation between manufacturing and services, but also enable the widening of tax base, further reducing the effective tax rate. It will help reduce distortions in the system and will facilitate investment decisions being made on purely economic concerns, independent of tax considerations.

This will create a truly unified Indian market, by enabling free trade and commerce throughout the country, unhindered by tax barriers and disparities and help India improve its brand image.