(This is an article I published on Spiked)
There are two ugly strains to the post-IPO Facebook-bashing: naivety about how the market works and hostility to individual ambition.
We live in strange times indeed; you could say we’re living in some sort of twilight zone. How else can you account for the fact that a process that raised $16bn and launched Facebook as a new public company with a market value hovering around the $100bn mark is now universally described as a failure? Squabble over the real value of Facebook if you will – $90bn? $85bn? Who knows? What is for sure, however, is that this is a staggering number for a company that neither produces anything nor makes anything.
Yet in all the discussion about Facebook’s IPO two points really stand out: First, Facebook and its founder Mark Zuckerberg are now morally suspect for apparently misleading the world and reaping such large rewards at the expense of small ‘Mom and Pop’ investors; and second, just how naïve and fickle the post-occupy ‘anti-capitalist’ world has become about the laws that govern the capitalist market.
The post-IPO discussion has centred upon whether Facebook, its founders and early investors as well as the companies that underwrote the IPO, misled investors. Lots of column inches have appeared accusing them of criminal behaviour, greed and selfish arrogance for enriching themselves at the expense of others, particularly small investors. Yet most of the outcry (and the lawsuits that appear to be lining up faster than the large investors appeared to divest their Facebook stock) is more like an infantile hissy fit by those prevented from playing the game according to their rules.
When Facebook directed by its early investors, senior management and its underwriters, led by Morgan Stanley, whipped up enthusiasm for the offering and increased the price to $38 which would have valued Facebook at around $100bn – a valuation which is 103 times the profits it made in the 12 months through the end of March, very few stepped back. Even Harry Redknapp (the one who apparently can’t read, write or add and subtract), can work out that this is more than slightly unrealistic. Even Facebook’s earlier warning that they had a problem with monetising advertising on mobile platforms could not stir the scepticism of those fighting to get their noses in the trough. The warning bells still did not ring loud enough when General Motors, the third largest advertiser in the US, shut down its Facebook budget (about $10million) saying that those ads were simply not doing enough to sell automobiles. (To be fair on this point, however, counter signals were equally strong: Ford endorsed Facebook as an advertising destination while David Eastman, CEO of as agency JWT North America also gave it very strong backing for the same reason). Yet with all the signals, buyers continued to salivate. The buzz was deafening. The result was predictable – a relatively small number of people made a killing while many did not. Welcome to the capitalist market ladies and gentlemen!
The market still rules
What did people think was going to happen? Do they honestly believe Facebook’s PR that this was going to be the ‘People’s IPO’? What world are they living in? What happened to the Facebook IPO is precisely what ought to have happened (apart from the collapse of the Nasdaq at the start of trading which has given rise to some legitimate claims of misconduct and numerous lawsuits showing that once again, insiders and lawyers will do well out of Facebook’s IPO).
What appears to be driving the outcry against Facebook is that at the last minute, some big investors were reportedly given access to an analysis saying that Facebook’s earnings and prospects weren’t quite as rosy as the picture painted in its early disclosure documents. Although this is not illegal as long as these disclosures are made verbally and not in writing before an IPO, this knowledge enabled the big investors to cut back or even cancel their orders to buy shares in the offering. These activities may even have had something to do with the Nasdaq foul-up that halted trading temporarily the day the stock debuted.
The result was that the exit of the big investors, combined with an increase in the number of shares being offered, left more shares available for individual investors, who paid the full retail price of $38. Although Morgan Stanley initially buoyed the price, by the end of the day and subsequently, Facebook’s stock price fell dramatically. Those who cancelled their IPO orders could have bought stock in the low $30s rather than at $38. However, retail investors paid $38 Friday for stock they could have bought at less than $32 a few days later. The real losers were those who bought shares in the open market after trading started some for as high as $45 a share.
But for the early Facebook shareholders who cashed out in the offering, the IPO was a bonanza. They made a killing. Early Facebook investors ranging from Zuckerberg to Microsoft to various venture capital funds sold a total of 241.2 million shares in the offering, compared with only180 million shares sold by the company itself (which is unusual to see early investors selling this big a piece — 57 per cent — of the shares being peddled in an IPO). Given how popular this IPO was, Facebook had managed to obtain an ‘underwriting discount’ – the amount that the underwriter keeps for themselves in return for doing the deal – to only 1.1% of the $38 offering price which is extremely low for an IPO. The Facebook insiders who sold in the offering not only got a high price for their shares but they also got to keep a very large proportion of the proceeds. As unorthodox as this may seem, this was a huge success.
The IPO was about raising capital for Facebook (to allow it to grow in the future) and its founders and early and large institutional investors (euphemistically referred to as the ‘well-connected’) whose interests are to accumulate wealth and who see Facebook’s ‘people’ as nothing more than inventory and data points to be used to generate advertising revenues (more on this below). You may not like this fact, but the law of the market is driven by capital accumulation and profit-making not moral sentiment. The vehicle used or what it may produce is incidental to the overriding objective of increasing personal wealth and profit in the here and now. Yes, the market is a Hobbesian jungle. The markets never forget their true nature. People do.
The Facebook IPO has proven that the law of the market still rules supreme despite the post-occupy moral critique of capitalism.
It is naïve to think otherwise. The reason is simple: firms typically IPO when the owners think they’re getting the deal that best suits them, i.e., the stock will be valued at a premium. This will always be contradicted by the goal of investors who want to buy at a discount—when they think they know something others don’t that can make the stock’s market capitalization grow in the period ahead. In the IPO world, they want to buy low and sell high—which is why IPOs often underperform the market in their first few years. The Facebook IPO was both a classic case of how this worked to the advantage of Facebook’s founders, large institutional investors but at the expense of smaller investors, to ‘Mom and Pop’ investors. Get used to it. It will happen again.
It is one thing to talk about empowering average people in the Facebook world, but empowering them in the financial world is a whole different game. Wall Street’s mission, contrary to Facebook and its users, is to empower and enrich the ‘well-connected’ – not those with hundreds of Facebook friends. Whatever the outcome, it was never going to be about ‘Facebook’s people’ (their customers) other than as fodder for advertisers from which Facebook can generate the types of revenues that would merit its ridiculous valuation.
It is not clear whether Mark Zuckerberg’s stated mission to connect and empower people around the world which he hoped could launch a ‘people’s IPO’ was naïve or a brilliant and calculated ploy. It’s impossible to read the mind of someone so young. No doubt Zuckerberg sincerely believes that what he is doing at Facebook is connecting and empowering the 900m users of Facebook. His stance appears only to have increased the desire of Wall Street to muscle in on the action. The fact that Zuckerberg refused to dispense with his hoody during the stock offering ‘road show’ in New York fuelled the illusion that Zuckerberg not the law of the market would drive this IPO. Whether this was deliberate of simply naïve is impossible to tell. But one thing is certain: if you sup with the devil you will play by the devil’s rules. And this is where the Facebook story begins to unravel.
In defence of Zuckerberg
As readers of this blog may know, I am not a great fan of Facebook as an expression of technological innovation. Yet the vitriol and criticism of Mark Zuckerberg that has emerged since the IPO forces me to come to his defence. Because of how the IPO worked out, there is now a palpable yet understated jealousy and envy about Zuckerberg’s success, that is questioning the legitimacy of ambition, the aspiration for wealth, success and the pursuit of big ideas. The main form this is now taking is the assertion that part of Facebook’s post-IPO problem is that its brand is too closely aligned with Zuckerberg with his boyish face, brilliant brain and billions of dollars. The fact that Zuckerberg refused to dispense with his hoody during the stock offering ‘road show’ in New York (mentioned above) left many to speculate about him as a CEO. There is, according to this view, the need for Facebook to distance itself from the Zuckerberg story. Zuckerberg’s unfortunate portrayal in the Hollywood blockbuster The Social Network with its glorified tale of dumb luck, cutthroat cunning and fast fame certainly doesn’t help.
But Facebook is about Zuckerberg; it is about the boyish computer geek who has created a multi-billion dollar company and hundreds of millionaires at the same time. Whatever you may think of Mark Zuckerberg his story is a brilliant example of individual achievement, the single pursuit of an ideal and a self-belief in changing the world. This should be celebrated and ought to be defended by anyone who believes in the human will and human-centred change.
But what we have seen as Facebook’s IPO has gone south, is the miserablists hardly able to disguise their joy as they line up and fantasise about knocking him off the pedestal they had placed him on.
There is something deeply distasteful about the attacks on Zuckerberg. While it is true that all successful technology-related CEOs or company founders have had their share of criticism, the ire against Zuckerberg is disproportionate and new. Other smart-guys-with-a-start-up-idea roots, like Larry Page and Sergey Brin never became the story of Google in the same way. Yes, Google stock has paid off for shareholders, but Facebook’s IPO is one week old! (No doubt if and when Facebook solve their mobile advertising problem and generate billions in revenue, we will hear a different story). Even Steve Jobs at Apple despite his ego and remarkable story, never had the same ire as that directed at Zuckerberg. Yes, and again, people accepted that Job’s was ‘the prick in the room’ but they loved Apple products and services (after some considerable time eventually making Apple the most highly valued company in the world). Even Bill Gates who was loathed and his company Microsoft universally mistrusted rode this storm with some ease. But in the post-occupy world, success itself, the pursuit of success, ambition and self-belief is now a legitimate target for ire, envy and downright criticism.
Defending Zuckerberg for the right reasons does not mean being uncritical of him either. Whether Zuckerberg played the game consciously or not, he has supped with the devil and now must follow the rules set by Wall Street. This poses one fundamental issue which I have discussed in earlier articles but which will define Facebook’s future. As a pubic company Facebook now has to grow its advertising revenues very rapidly putting itself under considerable pressure to collect more and more user data to help it target its advertising services. The question then for Facebook is who are its real customers? Is it its 900m + users who have flocked to the platform as it has helped fulfil their social needs? Or is it the advertisers looking to sell more consumer goods and who’ll pay for Facebook’s business model? Can the latter’s interests be reconciled with the former’s?
Facebook’s real dilemma
The scale of this problem cannot be underestimated. Some see this as the challenge of how Facebook can become more mobile. Essentially this actually means can Facebook extend its desktop advertising model to mobile devices in a way that does not destroy its users’ experience. The issue is not mobile or not (although mobile is a critical area for Facebook for the future). The issue is, can Facebook generate advertising revenue in whatever medium without destroying the reason why people have been attracted to its platform in the first place. This goes beyond the issues of privacy, which is already posing a considerable challenge. Indeed, before the IPO Facebook was served with a $15bn lawsuit around privacy breaches. People flocked to Facebook not because of its potential IPO but because it helped solved their social needs. (See my previous articles on this point). Can Facebook continue doing this whilst under pressure to deliver revenues?
This remains an open question. The one thing that has kept Facebook going is its reputation. While it has certainly shifted the debate about privacy it will find that the negativity surrounding the IPO and the attack on Zuckerberg has begun to raise uncomfortable questions about Facebook as a public company. The experience of MySpace, which declined dramatically when it tried to unsuccessfully square the advertising versus user experience circle, is apposite here. Whichever way this goes, you can be sure that the pressure from Wall Street will not let up.
Facebook’s IPO has brought to the surface just how far the scepticism about the market has gone in the US and abroad. Even while defending Zuckerberg, we should loudly point out that he remains part of the problem. That the world’s largest technology IPO has been reduced, in the end, down to the short-term future of advertising and how to get people to consume more through self-obsessed communication channels, expresses how low society’s expectations of this technology have become. This fact has been totally lost sight of. And it is this, not Facebook’s IPO that will shape the future.