Dr. Geek: Facebook Gets Punched in the Face

With over 900 million users, it’s hard to simply call Facebook a social network.  As a virtual community, it has the third largest population in the world, and could surpass India to become second only to China.  As Facebookistan, it generates revenue and investments that rival many other national economies.  People live and die, meet and separate, laugh and cry, all on Facebook.  Facebook is beyond a WWW-based platform: it is a cultural and social phenomenon that in less than a decade has shaped how we interact with each other in a number of spheres of life.

So why is it getting punched in the face by Wall Street?

Last Friday, May 18th, Facebook went public.  The traditionally very private company made an initial public offering (IPO) of sales of stock on the NASDAQ market.  For months there had been speculation about what the stocks would be initially sold for, and how much of a run on the market the IPO would cause.  Financial analysts discussed just how much the company is worth, and how the IPO could net a $16 billion profit, making it one of the largest in NASDAQ history.  Not bad for a company started in a college dorm room and is now estimated to be worth around $105 billion.  Would people invest in the phenomenon that was Mark Zuckerberg’s creation, or would there be lingering reticence thanks to the dotcom bubble and burst of the turn of the millennium?

Friday morning came, and Facebook celebrated it’s IPO with much fanfare.  The stock was initially offered at $38 a share, but opened higher at $42 a share with a heavy volume of shares being traded.  So for the first couple hours, everything seemed to be coming up Milhouse, as the stock climbed to a high of $45 a share.   But there were technical difficulties: NASDAQ was not properly registering, and thus not properly trading, all the requests to buy that came in before and during the opening of the market.

And then the stock fell, through the rest of the day, closing only slightly above its $38 offering price.  And then Monday, it fell lower.  And lower still on Tuesday.  As of this writing, the stock has rebounded only slightly, closing Thursday at $33.

Suddenly financial analysts are wondering what had happened?  Had Facebook been over-hyped?  Was the valuation of the company’s worth overinflated?  Did the selling signal a new bubble and burst in social media tech?

But it wasn’t just those questions being asked.  More serious ones emerged as the Securities Exchange Commission called for investigations into how Morgan Stanley, one of the investment underwriters promoting the IPO, handled it.  The allegation is that the investment firm, through some of its banks, provided insider information to select investors that the revenue projections of Facebook are not as rosy as what the company was publicly communicating.  Thus, while Morgan Stanley investors might have gotten the heads up to sell stock, other investors did not.  Additionally, Facebook shareholders wasted no time in filing suit against the company, alleging that they were not being treated fairly in the IPO because they were not given the information Morgan Stanley apparently was.

So what happened?  Well, you could say this is Facebook being Facebook — or, more accurately, Zuckerberg being Zuckerberg.  Many are the complaints tossed around Facebook status messages and news feeds on the seemingly constant changes Facebook undergoes.  Changes to the news feed, to the home page (what is now the timeline), to privacy controls, and so on.  Some changes perhaps are more deserving of complaint and scrutiny than others, such as changes to how users control their private information, and who can have access to it.  But all changes seem to be met with the same response: Facebook just doesn’t care about its users.

Now, Facebook the company does address the concerns, and will respond by making additional changes based on the feedback.  But the perception of an almost antagonistic apathy to users has not dissipated.  Facebook doesn’t care, and it is rather petulant about having to be forced to care.  And it was probably not helped by the movie The Social Network, which portrayed Zuckerberg as the poster child for antagonistic apathy.  Nor does it appear helped by the real Zuckerberg, who was secretly married this past weekend to his long time girlfriend while all of these concerns about the IPO began to mount.

This perception of the company then could easily be fueling the quick negative response to the IPO: not only does Facebook not care about its users, Facebook the company also does not care about its shareholders.  Zuckerberg’s actions towards investors and shareholders appears to be standoffish and perhaps even a bit dickish: on Friday, with his company’s stock starting to fall, even Zuckerberg sold a percentage of his holdings.  The company created two types of company stock, which vary in how much voting power shareholders have.  The ones being traded in NASDAQ have ten times less voting power than the private stocks only Zuckerberg and the higher ups in the company hold.  So is it any wonder then that the shareholders are crying foul?

However, this isn’t just a story about Facebook getting punched in the face.  The larger narrative considers what could be the future of all these social media technologies that have spurred so much of the recent growth in online and mobile technologies.  The larger narrative begs the question: are we seeing a new bubble and burst in Internet-based technologies?

To answer this question, let’s consider two relative newcomers to the social media phenomenon: Instagram and Pinterest.  Just last week, the Japanese e-commerce firm Rakuten invested $50 million in the social network Pinterest, which is valued at $1.5 billion without any hard evidence of or even model for its revenue projections.  Only last month, Facebook was looking to buy Instagram, the mobile app and photo-sharing service, for about $1 billion, although it too does not have a solid business model for generating revenue.  Perhaps these companies do not recall NewsCorp’s purchase of MySpace in 2005 for $580 million, only to sell it last year for $35 million.

There is a problem with investing in a company that does not make physical goods: the valuation of the company can be more based on hype than on the physical conditions of production and consumption.  Without the physical processes that limit the production of goods and the consumers’ purchasing power, the value of a company’s offerings can be highly skewed by the interest in those offerings and how “cool” they are to those who use it, and those who want to get to those who use it.

Facebook has had success thus far because it has beat out MySpace, and more recently Google+, to become the premiere online social network: the company has built a place for people to gather, and when people gather the businesses and marketers will follow.  But while they may have a monopoly now, there is no guarantee it will continue.  If it is no longer “cool” to be on Facebook, then the people will leave, and so will the businesses and marketers that fund the company.  And the behavior of Facebook towards its increasingly bungled IPO may accelerate it’s fall into “uncool.”  And if Facebook falls, then investors the world over may be more hesitant to jump on the social media bandwagon.  Because without interest, what do these virtual producers have to offer?