Facebook still has a long way to go to make its value credible
The interesting thing about the Facebook IPO (initial public offering) is that there was no first-day “pop”. In other words, the shares ended the day trading at just about the price at which they had started.
Given the advance hype, this surprised many observers and led some to speculate that the underwriters (the banks that handled the flotation) were discreetly buying shares to prop the market up. So could it be that the world is finally wising up to the truth about Facebook?
What is that truth? Simply this: Facebook is an advertising business: last year, 82% of its revenue – about $4 per user – came from that source.
Social networking is really just a means to an advertising end. It is achieved by providing an addictive service for millions of people who spend unconscionable amounts of time freely giving away the thing that advertisers really crave, namely detailed information about their lives and interests.
But therein lies a serious contradiction: Facebook cannot easily exploit this bonanza because its users obstinately continue to regard the platform as a private space: in a recent AP-CBNBC poll, for example, more than 50% of respondents said they felt “not safe at all” using Facebook to make purchases. Yet Facebook needs them to make purchases – lots of them. Those who know about these things think the company needs to make $20 a year from each user to justify the $105bn (£66bn) valuation produced by Friday’s IPO.
Power, someone once said, is the ultimate aphrodisiac. Maybe. But money runs it close. At any rate, a reality distortion field (RDF) surrounds anyone or anything that has lots of it. Thus the RDF surrounding Facebook’s market valuation produced selective amnesia in many observers who should know better. It caused them to forget AOL, for example, which at its IPO in 1992 was valued at $70m, soared to $150bn 10 years later – and is now worth about $2.5bn.
And then there’s the RDF surrounding Mark Zuckerberg – net worth currently $19bn plus – which seems to have blinded observers to the uncomfortable fact that the shareholding structure of Facebook means that he has total control of the company.
There are two classes of share – A and B. Each class B share carries 10 times the voting rights of its class A counterpart. Zuck owns 27.1% of the class B shares outright and the company’s pre-IPO filings to the Securities and Exchange Commission revealed agreements with other owners of class B shares to assign their voting rights to him. The net result is that he has voting control over at least 57.1% of the class B shares. In other words, he’s omnipotent.
This would be a problem even if Zuck had the brains of Einstein and the wisdom of Solomon. But, alas, he doesn’t. He is undoubtedly a smart and talented guy, but he also happens to have a megalomaniacal obsession – that everything has to be social, ie public. And if you’re a Facebook user and don’t like that – well, tough.
So we now have another powerful media company with a shareholding structure that renders its charismatic, single-minded founder immune from shareholder pressure. Remind you of anyone? Hint: it begins with “News”.