Valuing Facebook at $100 billion killed the company. While it could have continued to limp along as a privately held company, as a publicly traded company it has nowhere to go but down. That is a simple application of the Golden Rule … not the one about doing unto others, but the one that says, ‘Whoever has the gold makes the rules’.
The reason people make the mistake of thinking Facebook is a good proposition is confusion over who their customer is. They think the Facebook user is the customer, and that innovation and improvement will be directed toward increasing Facebook user satisfaction. That is hardly the case. The customer in Facebook’s business model – and in yours and in any other business – is whoever pays. In Facebook’s case, that is the advertiser. The Facebook users are not their customers – they are Facebook’s product.
The Facebook business model is pretty much the same as television’s and the news media. They offer up something for free to attract a crowd. They then sell access to the crowd to advertisers. The bigger the crowd, the more they can sell. Their measure of quality is not based on the content of the television programming, The accuracy of the news or anything else of value to their viewers or readers. The measure of quality is the size,demographic and spending power of the crowd they draw, and sell.
If you are a Facebook user, you get access to Facebook content ‘for free’,and in return Facebook sells access to you through passive advertising, and even more so by selling access to your personal data to advertisers. That’s the deal. the more of you and your information they sell, the more they make. You, as a Facebook user, will tolerate being sold and having your time and privacy invaded so long as access to Facebook content is worth it. When you reach the point that the intrusion on your life from being sold as Facebook’s product is no longer worth access to the content (or more likely you find another way to access the same content with less intrusion) you drop out of Facebook and they have fewer products to sell. It is a pretty straightforward deal, really.
So what can be expected from a publicly traded Facebook? Intense quarterly pressure to increase revenue – sell more advertising – grow the top line – with the only way to do that being to sell greater access to you, waste more of your time, intrude on your personal information more. And at the same time, reduce costs – which means spend less on enhancing the Facebook user experience. They may do a little or a lot of both and they may do it sooner, or they may do it later. But make no mistake, they have every pressure to push the scales away from making it a better proposition for the Facebook user, and absolutely no financial pressure to push the scales the other way. Privately held companies can invest in the product for the benefit of reasonable long term profits – but not publicly traded ones. So where it will end is very predictable. And the smart bet is, with a $100 billion book value – 100X earnings – the pressure to tilt the scales hard and fast will be intense.
What makes it even worse for Facebook is that, unlike television or the media, they don’t even control the content that draws the users they sell to advertisers. The users do. So every time a user says the scales have reached his or her personal equilibrium, they not only drop out of the pool of products Facebook has to sell, they take their personal information with them, degrading by a tiny bit the very thing that makes Faceook an OK proposition for users. Television and the news media can at least assure content that draws a pool of people to sell to advertisers by paying for it. Facebook can’t – hence, they are screwed in the long term.
I am quite sure the Facebook originators are well aware of this logical conundrum, which is why they chose to cash in quite a few of their chips while the cashing in was good. If you were one of the unfortunates who fell for the Facebook IPO, my advice is to cash out quick while the Facebook fever is raging. For the rest of us, sell Facebook short if you can, otherwise just sit back and watch to see who the suckers are holding the Facebook paper when the music stops.