I Don’t Want To Be Traded on Wall Street
Warning: What you are about to read might in some universe be construed as investment advice. That is not my intention, and I strongly suggest that only a fool would take investment advice from me.
That said, I’m going to talk about the news that Facebook is on the verge of its much lusted-after initial public offering. You can read the scoop in last night’s Wall Street Journal.
Despite some misgivings and ominous weakness in the global financial markets, Facebook is pushing ahead with its pursuit of $10 billion of investors’ money in exchange for about 10% of the company’s stock — which tells us that Facebook, and maybe Wall Street, thinks it’s worth around $100 billion.
I say to these powerful people who have the opportunity to bet their money on the social networking giant, started and largely owned by the doe-eyed Mark Zuckerberg: Be careful! It’s not that the smiling Zuckerberg, whose official bio always insists he doesn’t like the limelight, is out to cheat investors.
At the most fundamental level, I look at the advertisements Facebook sells and they don’t add up to me. I’ve been recording them for some time now and they are a mere step ahead of email spam.
Here’s a sample of what I’ve seen lately in that right-hand column recently: testosterone for virility, federal stimulus grants for wealth, dating services for loneliness, charities for good deeds, do-it-yourself solar panels for the environment; and iPads (held for the camera by none-other-than Steve Jobs) at 90% off. It’s never any different.
As I said, one small step ahead of email spam, but email spam costs an infinitesimal amount to send out. I don’t care how many users Facebook has (it says it has 800 million), these ads are next to worthless unless they are as cheap as sending email spam. And anyway, no spam king has ever been given credit for making more than millions — a far cry from billions.
This point about the huge number of Facebook users bears some examination as well. Facebook certainly grew fast, but there have been reports of a slowdown in recent months. There’s a glitch in Facebook’s future. There is only a finite number of people on the planet. And as Facebook reaches further and further into all sorts of exotic places, the people are poorer and poorer.
Then there is a more important issue on a moral and cultural level. Facebook is trading on your thoughts and desires. Maybe I’m crazily optimistic, but I keep thinking that at some point people will get turned off to their being monetized — the buzz word between the financial and the technical world to indicate how they will make money off of you.
To me the dynamic is ugly. I don’t want my thoughts, my troubles, my desires, or my whims paraded in front a bunch of greedy advertisers.
I do believe that advertising is all that Zuckerberg, Facebook, and the venture capitalists, who’ve been nurturing the monster so far, have on their minds, but it’s obvious that the implication is far more serious, conjuring up the various totalitarian nightmares in books and movies. If a machine were ever built that could read our minds by collating our scribbles and idle curiosities, we will be doomed to living in a futuristic nightmare.
The European Union is thinking about regulating Facebook’s sale of user data to advertisers. As word was coming out on Facebook’s public offering, the E.U. said it was going to clamp down on social networking companies’ sale of data on user’s political, religious and sexual statements. Read about it in the Telegraph in the U.K.
The newspaper reports a curious response from Facebook, which is quoted thusly: “Adverts are personalised to the individual user. We do not track peoples’ behaviour to serve advertising.”
I have serious doubts that what the Telegraph calls “sophisticated software” to data-mine users is very good today. I think of all the personalized ads I see on Facebook for myself, and ads that I’ve seen when I gave Google’s mail a try a few years ago, or my movie recommendations on Netflix, or my product recommendations on Amazon. But that doesn’t mean it won’t be effective in the future.
It’s the future that concerns investors. There’s no solid public information on Facebook’s financials now, and there won’t be until the actual public offering is issued. If you think about the idea of Facebook, it’s a fuzzy notion. When I compare it to Google’s core business of selling ads based on search terms, Facebook looks ephemeral at best. If I search for something, say T-shirts and jeans, it’s a pretty good bet that I might want to buy some. If I mention on Facebook that I wore nothing but a T-shirt and jeans all day, it doesn’t reveal anything.
The wizards of Silicon Valley will probably argue that their sophisticated software can, indeed, turn base metal into gold, but the wizards of Wall Street don’t even care about such realities.
A real investor, someone who would be allowed to buy shares of Facebook today, is thinking of only how and when he can unload them — even if some of them are patient and thinking in terms of years. Financial reporters have been carefully watching for deals in the 76% of Facebook shares that Zuckerberg doesn’t own. You can read a summary of these at the aptly named website Who owns Facebook. This list seems to have been compiled in March, and the early investors have done pretty well.
The wildest valuation I’ve seen was in May on a web site called Stat Spotting in an article headlined, “We Now Know Facebook Is Worth 200 Billion.”
The New York Times had a understated story last night that might have given pause to Facebook and some big investors. It gave six examples of recent tech public offerings and only one of them is selling above the initial offering price.
Goldman Sachs broke the ice last January, buying 1% of Facebook for $850 million. This put the total value of Facebook at $50 billion. But Goldman didn’t buy these shares thinking it would hold on to them for all eternity, only until it found buyers. Within a few months, the hype reached a guess at Facebook’s value at $200 billion. Not a bad return.