The most anticipated initial public offering (IPO) in more than a decade is upon us.
If you happen to be one of Facebook’s over 800 million active users, there’s a good chance you’ve heard that Facebook is going public. Facebook will be tradeable on the New York Stock Exchange under the ticker symbol FB and will likely be offered for just under $40. Now the question on everyone’s mind is: to buy or not to buy? Let’s take a look.
Since its founding almost exactly eight years ago by Mark Zuckerberg, a fellow AEPi from Harvard, Facebook has fought to remain private despite its huge public presence, so why is Facebook going public now? Well, they don’t want to. However, there is something called the 500 shareholder rule in which the Securities and Exchange Committee (SEC) requires that once a company has 500 shareholders, they must publicly disclose financial data. This is not technically a requirement to go public, but the requirements are so similar that most companies choose to do so once they have reached that threshold, which Facebook has now done.
By keeping private, Zuckerberg has been able to maintain almost complete control over Facebook, avoiding governmental regulation as well the scrutiny Wall Street brings to public companies. In other words, Facebook was able to maintain its freedom and independence, at least as far as that’s possible with hundreds of millions of daily users.
Now that Facebook is going public, I personally doubt it will be able to continue its success in the absence of that freedom, especially with competitors Twitter and Google+ gaining momentum.
Facebook is currently a powerhouse because of the inherent network externality associated with it. A network externality exists when a product becomes more valuable to the user as more people use it, potentially reaching the point of becoming a universal standard. One famous example of this phenomenon is Windows and Microsoft Word. This explains why as competitors eventually began to challenge Microsoft, it was still able to maintain a monopoly. At the time, so many people were using Word and Windows that people buying a new computer needed to have the same programs so that they could easily share documents and files. This was because the large consumer base already using Word and Windows made the value of the programs far greater than any of Microsoft’s competitors. Even with Apple computers becoming more and more popular today, a large majority of Mac users still run Microsoft Word.
So what does that mean for Facebook? If you watched The Social Network, you heard Zuckerberg say it himself: “Even a few people leaving would reverberate through the entire userbase. The users are interconnected; that is the whole point. College kids are online because their friends are online, and if one domino goes, the other dominoes go. Don’t you get that?”
As users begin to leave Facebook, I predict that Zuckerberg’s prediction will come true. The question then becomes when this will happen. Facebook’s biggest obstacle is the enormous challenge of keeping ahead and maintaining its status of being “cool.” So far it has been pretty successful at this, aside from its recent release of the new Timeline version of Facebook that has been met with a lot of user disapproval for a variety of reasons. It remains to be seen whether the pressure to remain ahead has finally caught up with Facebook or if this was simply a bump in the road.
Facebook could also lose users in the face of continuing pressure to address privacy concerns. Bills such as SOPA and PIPA could also prove trouble to the company if they or some version of them eventually become law.
Another key question is what Facebook will do with the billions the IPO will raise, especially considering that Facebook is an incredibly cheap company to run in comparison to other behemoths like Apple and Microsoft. While extra money is certainly an opportunity for good things, there is the chance of a potential Netflix disaster as well.
There is also the concern that Zuckerberg and company are simply attempting to cash out and move on, as Zuckerberg is poised to rake in $24 billion by going public. Or, investors on Wall Street could damage the stock by holding onto it until they make a profit and then dumping it afterwards to earn a quick buck.
It certainly wouldn’t be the first time.
If you would like to discuss Facebook’s IPO with DANNY BRAWER you can contact him at dabrawer@ucdavis.edu.
