The media frenzy over Facebook's private offering has already made Google's 2004 IPO look tame. This week Goldman Sachs abruptly ended its offer of Facebook shares to wealthy U.S. clients, leaving foreign investors rushing to fill the void. Goldman reportedly concluded that all the media attention left the deal in danger of violating U.S. securities laws. Given that Facebook boasts over 500 million users and is the subject of "The Social Network," a film widely considered a front-runner to win the Oscar for best picture, the intense public interest surely can't have been all that big a surprise.
The real question is whether Facebook is worth $50 billion – the implied value after a $500 million direct investment by Goldman and a Russian investment firm in late December. There are obvious uncertainties, starting with the paucity of financial results released by the still-private company. Even with the Goldman offering materials in hand, it's hard to run a discounted cash-flow analysis, not that it would even make much sense for a company so young and unproven.
That begs another question — the same one I posed when Google went public: Is Facebook that rare entity, the natural monopoly? This is a company that invents (or stumbles upon) a business model or technology impossible to replicate, meaning it can extract high profit margins for the foreseeable future. In Google's case I concluded it was, and invested accordingly. By having the largest community of users, whose patterns of behavior enable Google to constantly refine and improve its search algorithms, Google consistently delivers superior search results, giving it powerful (not to mention lawful) technological barriers to entry.
Can Facebook deliver a similar advantage? Or will it suffer the fate of Myspace, the once-dominant but now struggling social networking site? To me, this is the critical question for potential investors, one that transcends Facebook's current financial data.
Although I feel the tug of Facebook, I'm not a user. So I turned to someone who fits the key demographic: Adam Gilbert, 22, a 2010 college graduate now working as a media strategist in Chicago. Gilbert told me that Facebook pretty much constantly occupies a tab on his computer screen, although his active use of the site amounts to about an hour a day. He currently has 1,234 "friends."
Gilbert says he still has a Myspace profile "somewhere in cyberspace" but he hasn't used the site since 2007. He describes Myspace as "juvenile," mostly a music site, and one lacking a critical mass of the kind of users he wants to reach. By contrast, he says, Facebook is much more interactive and instantaneous, and a much better way to "promote yourself and build communities. Once you discover mutual interests, you can build spider webs" of like-minded friends.
My conclusion is that Facebook does indeed have at least some elements of the natural monopolies enjoyed by both Google and eBay. With the largest community of social networkers, Facebook has unrivaled data on how people use the site and can rapidly adapt to changing behaviors, much as Google adapts its search algorithms. And if your goal is to reach the largest possible community of like-minded people — to "promote" yourself or a product, as Gilbert mentioned — then you want to be part of the network with the largest number of users, just as someone wanting to sell at auction wants the site with the largest number of bidders. Facebook is obviously a marketer's dream, with tailored ad placements that could rival the effectiveness of Google's search-based ads.
Facebook is not going to be for everybody. At my age, I'm not looking for thousands of new "friends" — I have enough trouble keeping up with the ones I already have. But Facebook's potential strikes me as vast, and at this point, largely impervious to competition, not that it can afford to take anything for granted. I'll go way out on a limb here and say that I think Facebook is cheap at $50 billion. If it is a natural monopoly, and given that it already ranks first as the most-visited site in the U.S., it will someday deserve a valuation closer to Google's — which this week stood at over $200 billion.
Had I been a qualified Goldman client with the minimum $2 million to spare, I would have been angling for shares. And I'd be hopping mad that chance was taken away. But a public offering, with better disclosure and investor safeguards, may still prove to be the better deal — and one much more widely available to the rest of us. It depends on how Facebook deploys its new capital and whether other investors embrace my optimistic view between now and 2012, when Facebook has indicated it might go public.
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