Facebook’s Secret Strength

By Matthew Yglesias

Facebook CEO Mark Zuckerberg speaks to the TechCrunch Disrupt SF 2012 conference on Tuesday in San Francisco

Since the May IPO that valued Facebook at $100 billion, nothing much has gone well for the social media giant. The price of shares steadily tumbled through the summer, down to about half their IPO value before a stirring talk by founder and CEO Mark Zuckerberg at the Techcrunch conference in San Franciso yesterday helped give the stock a small bounce.

But as Facebook owners freaked out by the weak share price already know, there’s really nothing they can do to make Zuckerberg do anything about it. That’s because, as I noted when Facebook first filed its IPO paperwork, the company’s corporate governance structure is unusual. Specifically, there is no governance structure to speak of. An absolute majority of voting power is controlled by Zuckerberg personally, and there’s no requirement for members of the board of directors to be “outsiders” to the company. The firm is publicly listed and you can buy and trade its shares on the stock market, but the company is Zuckerberg’s personal fiefdom, at least until he wants to cash out some of his voting shares.

The current crisis in Facebook’s share price shows what a wise decision it was to preserve that personal control.

You can think of a stock price as driven by two separate factors. One is the company’s profits, or “earnings” in accounting-speak. The other is the price-to-earnings ratio—in other words, the total value of the company’s stock divided by its profits. The economy-wide P/E ratio bounces around quite a bit from year-to-year, driven by various manias and panics, but the long-term average tends to hover around 15. But individual companies can diverge quite a bit from this trend. A profitable company in an industry that’s in predictable long-term decline (think newspapers in 1999) or that has limited growth potential (an electrical utility that can’t really move into new markets) might have a lower P/E ratio. Alternatively, a new-ish company that’s poised to grow faster than the corporate sector as a whole may have a high P/E ratio.

So a firm’s share price has two different elements—profits, and what amounts to a prediction about future profits—and only one of them is really under the control of managers.

That’s not to say that managers don’t have influence over actual future profits. This is arguably the most important job they have. But delivering future profits and deliveringoptimism about future profits is a different thing. Ever since the 2008 crash, for example,Apple’s stock has traded at a P/E of around 15 with the markets expecting approximately average growth in profits. Quarter after quarter, Apple beats that—meaning you’ve made a lot of money if you bought Apple stock four years ago—but this hasn’t shaken the overall market’s conviction that the fundamentals for a consumer electronics company that’s lost its charismatic founder has only average prospects. Amazon, by contrast, has seen its P/E ratio soar from an already aggressive 50 to a crazy-high 314.

This kind of shift in sentiment is enormously important to the value of shareholders’ investments. But it’s difficult to change, and counterproductive for managers to focus on it. After all, the optimism level reflects something like average sentiment about the long-term merits of the current business strategy. But if formulating a strategy that leads to explosive long-term growth were easy, everyone would do it. Picking the right strategy and picking the strategy Wall Street and investors think is right are different things. Part of the genius of Facebook’s corporate dictatorship is that it lets Zuckerberg focus on finding the right strategy, rather than focusing on popular opinion about what the best strategy would be.

Even better, it frees Zuckerberg from the need to waste time spinning about issues that are totally out of his hands. Facebook’s financial future depends on many variables that are hard, or even impossible, to predict. One strength of the company is that, in principle, it’s totally global. It works just as well in Florida as in the Philippines. But maps of Facebook usage show weird blank spots, including all of China, where, for political reasons, the service can’t be accessed. Whether that billion-strong market is opened to the company has huge implications for its future. So does the question of whether India’s government gets its act together and lets the world’s second-largest country enjoy a couple of decades of China-style supercharged growth. If those 2-billion-plus people become as lucrative to Facebook as the average American, that’s great for the company. If not, the outlook is a good deal worse. Investor sentiment about the likelihood of these outcomes is an important driver of Facebook’s price, but there’s nothing Zuckerberg can do about it.

And yet, even though much of the uncertainty around Facebook’s future is out of the CEO’s hands, the market’s strong response to Zuckerberg’s talk shows that he can affectperceptions of the future outlook. A Facebook CEO who wants to do right by his shareholders would learn the lesson that he needs to spend less time running the company and more time talking about it. Indeed, the CEO of a normal public company that experienced this kind of share price collapse would essentially have to. He would have to, even though on some level it’s perfectly obvious that shifting focus in this way would be a poor use of his time. Freeing Zuckerberg from that kind of burden is the company’s best hope for navigating what continues to be a challenging environment for any company (Slate and its parent company included) that largely depends on online display advertising for revenue.

Facebook’s unorthodox, shareholder-screwing governance structure gives Zuckerberg precisely that freedom. There’s no guarantee that anything he does will vindicate the company’s once-lofty share price, but the fact that the CEO is able to ignore shareholder interests is one of the best reasons for optimism that he can.

How much is Facebook really worth?

By Tom Foreman

Depending on who you talk to, Facebook is valued at more than $50 billion -- maybe even as much as $65 billion.

Forbes puts the social networking site's market value higher than Lockheed Martin, Boeing, Target, Sony, Nike and the major automakers.

But CNN spoke to some observers who aren't so bullish.

"Facebook's not worth $50 billion. I mean, it's just not," according to Douglas Rushkoff, an author and respected teacher on new media. "What people think is that Facebook in the future might be worth more than $50 billion, but for Facebook to be worth more than $50 billion it would have to become a permanent fixture."

Launched by Mark Zuckerberg just seven years ago in his Harvard dorm room, Facebook has been nothing less than a sensation. The site has almost 600 million worldwide users and enough influence to make its founder Time magazine's Person of the Year. Facebook is even getting credit for helping to topple regimes in the Middle East.

The recent hit movie, "The Social Network," certainly promoted the idea that Facebook is worth a fortune. The film itself has earned more than $220 million dollars in theaters worldwide.

But the $50 billion price tag came from a far less flashy source: Goldman Sachs. The investment firm reportedly paid $500 million for 1% of Facebook. And $500 million is 1% of $50 billion.

"No one is offering $50 billion at all for Facebook," said Lise Buyer of Class Five Group, a Silicon Valley firm that advises companies on going public.

Buyer is an analyst who makes her living helping investors figure out what companies, especially internet firms, are worth. And she says no one in Silicon Valley really has any idea about Facebook's value, even though they all concede it could be a lot.

"Oh, Facebook is definitely worth something because it's a company that's collected more personal information about 600 million ... individuals than any company has ever had access to before, and marketers love that information," she said.

Facebook's real fortune

That's the real fortune of Facebook: access to all that information about consumers. What music and movies we like, where we shop, how much we spend, what we eat, where we vacation, and who our friends are.

"We are the thing that Facebook has of value. We are the only thing they have to sell," said Rushkoff, who teaches media studies at NYU and the New School University.

Most Facebook users probably think they are customers of the site. Think again, Rushkoff says.

"The user's not the customer of Facebook. The user's the product," he said. "The customer at Facebook is the people paying Facebook, and who's paying Facebook? Market research firms and advertisers."

Zuckerberg, the boyish CEO, has long said the goal of Facebook is to connect people. Facebook also has repeatedly and publicly spoken about its commitment to protecting the privacy of its users.

But analysts say the judicious use of that information must inevitably form the economic backbone of the company, because it allows targeted ads to be put in front of the most likely buyers with unprecedented accuracy.

For Facebook, that's the potential gold mine -- and the risk. Because even the company does not know how the public will respond if Facebook tries to cash in on all that data.

"It's one thing for me to send that [information] to my friends," Buyer said. "It's something else for someone else to try to use that information to market to me. Now maybe, folks who will be marketed to will be happy to have ads from their real interests. Maybe they won't. We'll see."

To become a permanent fixture on the internet, Facebook must transform itself from a wildly popular social network into a money-making machine. And analysts say that will be tricky.

"When Facebook goes over that line ... as it will have to justify its valuation, and starts selling us and who we are to its real customers is when people are going to get that itchy feeling," Rushkoff said. "When you look at the ways in which people are actually committed to Facebook, it's not so strong that they can't move somewhere else."

Mystery finances

The company's finances are something of a mystery. No one outside of Facebook knows what the company is truly worth, or how much revenue it's bringing in.

"They're a private company so they don't really have to share what they are making or not making with us...or how they're making it," Rushkoff said.

And with ongoing legal battles over whether Zuckerberg truly had the original idea for Facebook, no one close to the financial records is talking.

When CNN contacted Goldman Sachs to ask why they thought it was worth investing $500 million in Facebook, the firm politely said, "No comment."

Facebook passed along the following statement: "We're focused on creating a useful service and building our business for the long term."

That long-term future may be Facebook's biggest challenge. Remember MySpace?

The Facebook's seven-year history is an eternity on the Internet, where other dreamers are hard at work, especially in Silicon Valley, trying to knock them off the top.

"Those of us who still mention Facebook ten years from now, will mention it in the same sentence as AOL, and Friendster, and MySpace," Rushkoff said. "As yet another thing that we thought was invincible and turned out to be another passing fad."

Will his dire prediction prove to be right? That ultimately will depend on how many people remain friends of Facebook as it tries to realize its full value, and how many do not.

Facebook is making a phone

By Brandon Griggs

A week after Facebook's bungled IPO comes fresh news to tantalize, or torment, the company's investors. The social-networking behemoth may be making a phone.

Facebook hopes to release its own smartphone by next year, according to a New York Times report quoting anonymous sources at the company and others who have been briefed on Facebook's plans. Facebook has already hired more than half a dozen former Apple engineers who worked on the iPhone, the report said.

We've heard this before. In 2010, TechCrunch reported that Facebook was building software for a phone and partnering with a third party to make the hardware. Citing their own sources, tech blog AllThingsD said last year the phone was code-named "Buffy" and would run on a version of Android modified to integrate Facebook's services.

Facebook's iPhone: The most ill-fated idea since Palm Pre?

But Sunday's Times report added new specifics such as an interview with a former iPhone engineer who said he recently met with Facebook CEO Mark Zuckerberg, who "peppered him with questions about the inner workings of smartphones," including the types of chips used. "It did not sound like idle intellectual curiosity, the engineer said."

A Facebook spokesman declined to comment on the report Monday. The company had referred the New York Times to a previous statement that said in part, "We're working across the entire mobile industry; with operators, hardware manufacturers, OS providers, and application developers."

A Facebook-built smartphone could allow users to more seamlessly send messages, post updates and share photos or article links. Although it makes apps for iPhones and iPads, Facebook is still not integrated into Apple's mobile operating system, for example.

The news arrives amid speculation that Facebook, facing new pressure as a public company, will need to develop fresh sources of mobile revenue and exert greater control over its mobile products as users spend more time networking on phones or tablets instead of laptops or desktops.

Opinion: Was Facebook's botched IPO a conspiracy?

"Mark (Zuckerberg) is worried that if he doesn't create a mobile phone in the near future that Facebook will simply become an app on other mobile platforms," a Facebook employee told the New York Times.

It also comes days after rival Google closed its $12.9 billion acquisition of Motorola Mobility, a deal that could let Google make its own smartphone, too.

Many tech bloggers believe such a move would be a bad idea for Facebook, in part because there's no clear-cut consumer need for a Facebook phone.

Henry Blodget of Business Insider wrote that Facebook would face stiff competition in the hardware business, an area where it has no experience and where profit margins are historically low.

"So instead of building a phone, which seems like a desperate move, Facebook should partner with every operating system and carrier and hardware maker it can to try to embed this social platform within every mobile platform," Blodget said. "And it should build great apps to float on top of these systems."

In a post titled "It'll Be A Miracle If The Facebook Phone Doesn't Suck," TechCrunch's Alexia Tsotsis was more blunt.

"Making phone hardware is hard work, much harder than anything Facebook has ever attempted in the past," she wrote.

"Basically, there are a million ways this project will fail, and just one way it will work: Facebook ostensibly could succeed by tapping into the opening in the mobile market where people want an alternative to poorly designed Android phones ? targeting people who would buy something other than an iPhone if the price point was $150 less and the design were at least a little bit more ambitious than what is currently available on Android."

10 fascinating Facebook facts and what they say about us

By Pete Cashmore

A study released this week revealed that 47% of Facebook users have swear words on their pages. A survey last week, meanwhile, showed that undergraduate men who talk about alcohol on Facebook tend to have more friends.

Whether it's our level of tolerance for swearing or the link between alcohol and bonding with friends, these Facebook studies provide intriguing insights into our online behaviors.

And yet I'd argue that Facebook surveys have a more fundamental role. With more than 600 million people actively using Facebook, these studies in fact provide a deeper understanding of our evolving cultural norms: our values, our morals and our changing relationships between one another.

Don't believe me? Here are some fascinating Facebook facts that just might serve as a peek into our 21st-century values.

1. 56% of Americans think it's irresponsible to friend your boss on Facebook

A survey released in February 2010 showed the majority of Americans don't find it socially acceptable to be Facebook friends with their boss. The study of 1,000 people by Liberty Mutual's Responsibility Project suggests that despite an increasing overlap between our work and home lives, we continue to value a separation between the two.

Meanwhile, 62% of those surveyed said it's wrong for a manager to befriend an employee on Facebook. And yet 76% of respondents said it was acceptable to befriend a peer on Facebook, suggesting what we truly value is that our work be judged on its merits rather than getting ahead based on personal relationships.

2. Facebook links about sex are shared 90% more than average

Facebook confirms the adage: Sex sells. From February until May 2010, social media scientist Dan Zarrella processed 12,000 links to news sites and blogs. He discovered that links about sex were 90% more likely to be shared on Facebook than any other subject matter.

He also discovered that links with positive sentiment were more likely to be shared on Facebook than those with negative viewpoints.

3. People in Facebook relationships are happier than single people

In February 2010, Facebook marked Valentine's Day by comparing the relationship status of its users to their happiness -- this was surmised based on the level of positive or negative sentiment in the user's Facebook updates.

The result: Those in relationships were found to be slightly happier than single people. Those who were married or engaged were also happier than single people on average.

However, Facebook users in an "open relationship" -- where the partners are not exclusive to one another -- were significantly less happy than single people. Monogamy, it seems, makes us happy.

4. 21% of people would break up via Facebook

A June 2010 survey of 1,000 Facebook users -- 70% of whom were male -- found that 25% had been "dumped" via Facebook (via their significant other updating his or her relationship status).

Twenty-one percent of those surveyed said they would end a relationship by changing their Facebook relationship statuses to "single." While worrisome, the survey does show the majority of people do not split up via Facebook.

For this uncomfortable task, it seems, we still turn to more personal forms of communication. This particular study also appears to suffer from a little male bias -- a July 2010 survey found that 9% of women have initiated a breakup via Facebook, versus 24% of men.

5. 85% of women are annoyed by their Facebook friends

For women on Facebook, friends can sometimes be irritating. In a March study conducted by Eversave, 85% admitted to having been annoyed by their Facebook friends. Of these annoyances, the most cited was "complaining all the time" (63%).

Other pet peeves included "sharing unsolicited political views" (42%) and "bragging about seemingly perfect lives" (32%).

While I've yet to see a similar survey focused on men, it's probably safe to assume these feelings are universal: Our friends are a source of joy and occasional irritation.

6. 25% of households with a Facebook account don't use privacy controls

A June 2010 survey from Consumer Reports stated that "in one of four households with a Facebook account, users weren't aware of or didn't choose to use the service's privacy controls."

While Consumer Reports chose to interpret this finding in a negative light, I'd propose a contrary view: Seventy-five percent of households did take the time to understand Facebook's privacy controls, suggesting that privacy remains important to our society.

The same study stated that "Twenty-six percent of Facebook users with children had potentially exposed them to predators by posting the children's photos and names."

Again, the positive view would be that 74% of Facebook users with children did not post their photos and names -- suggesting that we value privacy.

7. 48% of parents friend their kids on Facebook

On the question of whether it's OK to friend your kids on Facebook, parents are roughly split down the middle -- 48% have chosen to do so. Respondents in a May 2010 survey by Retrevo admitted that this could be "awkward at times."

Parents were also asked about the minimum age at which their children should be allowed to sign up for Facebook or MySpace. Twenty-six percent of parents replied "over 18," 36% said "16 to 18," 30% said "13 to 15" and 8% said "under 13."

Opinions may be changing rapidly, however. A Consumer Reports survey released this month says the majority of parents of kids 10 and under "seemed largely unconcerned by their children's use" of Facebook.

8. 47% of Facebook users have profanity on their walls

As previously mentioned, a new study by the reputation management service Reppler has found that 47% of Facebook users have swear words on their walls, with these profanities being posted by a friend 56% of the time.

In other words: Nearly half of Facebook users are comfortable with swearing. The most common profanity on Facebook? No prizes for guessing: It's the "F-word."

9. 48% of people say they look at their ex's Facebook profile too often

In a January study by YouTango, 48% of respondents said they look at their ex's Facebook or other social-networking profile too often. The statistic illustrates one danger of social-networking profiles -- ex-partners are more accessible than ever.

But the survey also points to a degree of self-awareness among the respondents. While new technologies provide new temptations, it seems that many of us are able to control these behaviors.

10. 36% of under-35s check Facebook, Twitter or texts after sex

An October 2009 study by Retrevo suggested that social networks are becoming an increasingly important part of young people's lives. Among under-35s, 36% admitted to "tweeting, texting and checking Facebook after sex." Forty percent of respondents admitted to doing so while driving, 64% said they do so at work, and 65% use these communication channels while on vacation.

Here, we might conclude that the next generation is driving society into a less desirable direction: a world in which digital devices are never put down, even in the most inappropriate of situations.

And yet if Facebook is our guide, I'd say our cultural norms have remained intact. We continue to value professionalism. We find great rewards in human relationships -- and most of us try to exit them honorably.

On the whole, we continue to value privacy. We try to look out for our kids. And as we have been since time immemorial, we continue to be fascinated by sex -- after which we go straight to Facebook to find out what our exes are up to.