Keep your friends close and your shareholders closer.
Facebook last week filed for its long-anticipated initial public offering. The US$5 billion offering is the largest in Silicon Valley history and more than double the size of the still-legendary Google IPO from eight years ago.
This is great news for Mark Zuckerberg, Facebook’s founder, who could more than double his US$17 billion net worth and jump up to No. 3 on the Forbes list of America's wealthy. The 27-year-old will be just behind Bill Gates and Warren Buffett.
Good for him and the other five Facebook billionaires, right? They created a valuable global enterprise and inspired an Academy Award-winning movie — all from a Harvard dorm room idea.
What does Facebook’s fortune mean to you and your fellow 800 million users? The naïve view might be a sense of pride in playing a small role in the biggest business story of the year. Another view is that you and your friends work for Zuckerberg and Co., in their global volunteer sales force.
The initial lure was the usual free Web service, but Facebook’s social attractant was so compelling that 800 million of us gladly handed over personal and otherwise private details about ourselves. Privacy is the new currency. Facebook’s projected US$100 billion valuation is built on the profiles of its friends and fans. What’s fascinating is that Facebook users are not paying customers but are living, breathing assets who contribute directly to Facebook’s enterprise value.
A 2010 study of the 20 top Facebook brands calculated the average annualised value of an individual Facebook fan to be US$136.38. The total potential fan value is US$108 billion and, keep in mind, that’s just an average per brand and the study is 18 months old. When Facebook passes the 1 billion user mark later this year, we’ll need to upgrade to an exponential calculator to estimate just how valuable their audience is to marketers.
How can friends and fans own a piece of the rock? Unless Zuckerberg borrows the Dutch auction trick from the Google IPO playbook, the average Facebook user is not likely to participate in their IPO. Morgan Stanley has been chosen to lead the IPO, and the big institutional investors will be at the front of the line to gobble up the “FB” shares on Day 1.
What does Facebook’s fortune mean to other media companies? Yes, I said other because it’s clear that Facebook is now a media company with the largest and most loyal audience in the world. Facebook's business model has evolved from a social media platform to a media company with dual revenue streams: advertising and credits.
As we learned in Facebook’s SEC S-1 filing, its advertising revenue topped US$3 billion in 2011. That sounds like a media company to me. As a nice, little, half-a-billion-dollar side business, Facebook Credits is virtual money purchased with real money by Facebook users to play games from third parties such as Zynga. The company behind FarmVille, which had its own billion-dollar IPO in December, paid more than US$400 million in credit fees to Facebook last year. With those surprising numbers, a post-IPO enterprise value of US$100 billion is within striking distance.
Propped up by unwitting stakeholders who passively gave up their online privacy, Facebook is an 8-year-old company that will soon dwarf every news media company in the world. Facebook’s windfall makes it harder than ever for struggling publishers to maintain policies that respect rather than exploit the privacy of customers.
How can the newsmedia industry stay on the high road while an upstart media company wins big playing by a different set of rules? That just became the US$100-billion-dollar question.