A fistful of dollars - Facebook may be a good bet for investors now; but

1970-01-01 02:00:00

rlp

IT ALL began as a lark. Mark Zuckerberg posted pictures of his fellow Harvard

students online to let viewers comment on who was hot and who was not. Eight

years later, Facebook is one of the hottest companies in the world. On February

1st the social network announced plans for an initial public offering (IPO)

that could value it at between $75 billion and $100 billion (see article). This

is extraordinary. Investors believe that a start-up run by a cocky 27-year-old

is more valuable than Boeing, the world s largest aircraftmaker. Are they nuts?

Not necessarily. Facebook could soon boast one billion users, or one in seven

of the world s population. Last year it generated $3.7 billion in revenue and

$1 billion in net profits. That is nowhere near enough to justify its price

tag. But there are reasons to bet Facebook will justify the hype, for it has

found a new way to harness a prehistoric instinct. People love to socialise,

and Facebook makes it easier. The shy become more outgoing online. The young,

the mobile and the busy find that Facebook is an efficient way of staying in

touch. You can do it via laptop or smartphone, while lying in bed, waiting for

a bus or pretending to work. You can look up old friends, make new ones, share

photos, arrange parties and tell each other what you thought of the latest

George Clooney film.

As more people join Facebook, its appeal grows. Those who sign up (and it s

free) have access to a wider circle. Those who don t can feel excluded. This

powerful feedback loop has already made Facebook the biggest social-networking

site in many countries. It accounts for one in seven minutes spent online

worldwide. Its growth may be slowing in some rich countries unsurprisingly,

given how enormous it already is. And it is in effect blocked in China. But it

is still growing fast in big emerging markets such as Brazil and India.

With a little help from my friends

A $100 billion price tag would hardly be cheap, but other tech giants are worth

more: Google s market capitalisation is $190 billion, Microsoft s $250 billion

and Apple s $425 billion. And the commercial possibilities are immense, for

three reasons.

First, Facebook knows a staggering amount about its users. It is also

constantly devising ways to find out more, such as Timeline, a new profile page

that encourages people to create an online archive of their lives. The company

mines users data to work out what they like and then hits their eyeballs with

spookily well-targeted ads. Last year it overtook Yahoo! to become the leading

seller of online display ads in America.

Second, Facebook is the most powerful platform for social marketing. Few sales

pitches are as persuasive as a recommendation from a friend, so the billions of

interactions on Facebook now influence everything from the music that people

buy to the politicians they vote for. Companies, like teenagers, are

discovering that if they are not on Facebook, they are left out. Social

commerce (or s-commerce ) is still in its infancy, but a study by Booz &

Company reckons that $5 billion-worth of goods were sold in this way last year.

Finally, Facebook is becoming the world s de facto online passport. Since so

many people have a Facebook account under their real name, other companies are

starting to use a Facebook login as a means of identifying people online. It

has even created its own online currency, the Facebook Credit.

That is the case for Facebullishness. But there are also two sets of reasons to

worry. The first is the managerial challenge of jumping from start-up to giant.

Facebook has only 3,200 employees, many of whom will now become paper

millionaires. The prospect of having to motivate VIP employees Silicon Valley

shorthand for workers vesting in peace may explain why Mr Zuckerberg delayed

a flotation so long. With the billions of dollars that the IPO will bring in,

the firm will add more people and services. It has already rolled out an e-mail

service and persuaded millions of other websites to add buttons and links that

enable Facebook users to share material. It is bound to add an online-search

function that will heat up its battle with Google, which is including

information from its Google+ social network in its own search results.

Google has made the jump from popularity to profitability. For all its talk of

new revenue streams, Facebook is still dangerously dependent on display ads.

And there is a tension between attracting users and squeezing money out of

them. Facebook s greatest asset is the information that its users willingly

surrender to it. Turning such data into cash, however, will inevitably raise

privacy concerns. Most users don t realise how much Facebook knows about them.

If they start to feel that it is abusing their trust, they will clam up and log

out.

What Rockefeller was to oil...

This is where the other set of worries emerges and these should concern more

than just investors. America s Federal Trade Commission has already forced

Facebook to submit to a biennial external audit of its privacy policy and

procedures. As this newspaper has argued before, it would be better if

Facebook, Google and other web giants switched their default settings from

opt-out to opt-in (so that users had to give permission for the companies to

use their data).

Further down the line there is antitrust. Technology is fiendishly hard for

competition tsars. On the one hand, it creates competitors quicker than any

other industry (remember AltaVista, or Myspace?). On the other, network effects

help to create monopolies. No other social network is nearly as big as

Facebook, and it will soon be rich enough to buy up potential rivals. Many

firms feel they have no choice but to deal with it, and some already resent its

clout.

For the moment, leaving Facebook alone makes sense. Its users can switch if

something better comes along and its war with Google is only just beginning. If

either firm behaves in a predatory way, it should be punished. But just as

Microsoft once fell foul of trustbusters, so the new web giants surely will for

good and bad reasons. It seems likely that Google will soon face a probe from

the European authorities; Facebook will probably follow one day. The film has

already been made, but the Facebook story is likely to get more intriguing.

from the print edition | Leaders