Diamonds are Forever - But What About Facebook?

The financial world is talking about little other than the long-anticipated Facebook IPO. After the first day of trading, the company was worth $104 billion and change. No big spike in the share price, and it’s probably not going anywhere but down. Still, Mark Zuckerberg owns around 30% of the company. Nice going, kid. Now lose the hoodie, will ya?

I’ve enjoyed what Facebook offers, particularly the ability to reconnect with old friends and family around the world. This is what I “Like” most about it. I suspect that most of my FB friends feel likewise – ooh, lousy unintended pun.

I also suspect that, like me, my FB friends would beat a hasty path to the exits if Facebook begins charging any type of fee for its members. Will the pressures of being a public company, filing those quarterly reports for gimlet-eyed analysts to rip apart, drive them to do it anyway?  

Facebook is not a society of friends. It is a business. Business doesn’t succeed unless it delivers something of value. Has it been delivering value that it can “monetize?” (Hate that word!) The answer is “yes” thus far, but it may not last.

To understand what’s gone on with Facebook, and why it was so pre-IPO successful, you can learn much from Andy Kessler’s Wall Street Journal column of Groundhog Day, 2012:

“The Button That Made Facebook Billions:  The power of 'Like' as an emotional sensor is driving the company's exorbitant valuation.”

Rather than attempting to condense and paraphrase Andy, I’ll quote him and another WSJ piece. They tell the story better than I can. Andy points out,

“As bizarre as this sounds, one of the most valuable innovations in technology over the last several decades is Facebook's "Like" button. That's what has propelled the company to a galaxy-orbit valuation [before] its initial public offering.

"This is not only because the word "like" is, like, the identifying word of an entire generation. It's because computing has evolved beyond just taking directions from humans — and instead is cozying up to us and sniffing out our emotions and intent.

"[…] running ads next to pictures of your buddy Johnny funneling beers at a lacrosse game is not exactly what [advertisers] had in mind. Then, in mid-2010, Facebook rolled out its “Like” button, which transformed the company from a somewhat interesting social network into a major media player. The power of Like as an emotional sensor is what's driving Facebook's exorbitant valuation.

“Google, worth $190 billion with $38 billion in annual sales, is the closest real competitor to Facebook. Google lures you to its site via its search engine and sells ads against results, paid per click…basically it runs an ad platform. It's a great business with operating profits of 35%, similar to Facebook's.

“Facebook doesn't sell phones or tablets, or ship physical products or even do searches. Instead, it has a vibrant, pulsating community of 845 million people willing to share their personal lives with others. Facebook is a giant emotional locker.

“The adage about advertising is that only half of ads are effective, but no one knows which half. With the ‘Like’ button, Facebook is like Bob Eubanks on "The Newlywed Game," who promised contestants "a prize chosen especially for you." Advertising's nirvana is an ad chosen especially for you. Of all the players, Facebook is the closest to delivering.”

The Journal article says that Facebook too is profitable, although development and employee costs are growing faster than its revenue, and

“Facebook's revenue is still driven by online ads. The number of ads delivered on the site grew 42% and the average price per ad grew 18% over 2011 from 2010…”

Can they keep it up? Maybe, maybe not. I’m betting that they won’t. I’ve never clicked onto an online ad on Facebook. Yes, it’s eerie how their algorithms work. Mention a particular topic in a post, and it becomes a “keyword.” An advertisement for some related product then appears on your Facebook page. But I’ve never clicked onto such an ad, and I suspect you haven’t either.

A few days ago General Motors threw a stink bomb into Zuckerberg’s party by declaring that paid advertising on Facebook was ineffective. Other companies disagreed, but GM stopped spending. It remained on Facebook’s free ride with its own page, but it’s not going to pony up anything for paid ads.

I don’t know how much of that enthusiastic emotional sharing that drives the algorithms is going on these days either. The postings don’t seem as frequent or as charged as they did a few years ago. That, too, might be an indicator that the Facebook train is slowing down.

And finally, now that Zuck and his insiders have all cashed out, don’t expect them to be as dedicated and committed to making Facebook better and better. It’s no longer “their” company, and they’ll be occupied with finding ways to put their bonanzas to work.

How long will it last? Who knows – success in business breeds imitation and competition. There surely is a “Next Big Thing” out there somewhere. As the accompanying picture reminds us, as once we heard from Shirley Bassey in the title song of the James Bond movie, only "Diamonds are Forever."

In the meantime, let’s understand what’s going on here while we enjoy our online friendships.

And remember that while you’re still on Facebook, What You ‘Like’ is What You See – in advertising pitches. You’re in control!

Remember too – if you’re my Facebook Friend -  doggone it, I “Like” You.