Facebook IPO: Putting a Value on Social Media Giant
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Facebook IPO: Putting a Value on Social Media Giant

bjbjLULU JUDY WOODRUFF: Next: putting a value
on the social media giant Facebook. Jeffrey Brown has our story. JEFFREY BROWN: From its
founding in 2004, that recently, Facebook has grown into a worldwide phenomenon, now
with more than 800 million users. It’s the place to gather online friends, share your
photos, likes and dislikes. It’s been seen as a potent tool for democratic change and
slammed for making too much of our private lives public. Now what started as a small
social hangout conceived in a Harvard dorm could become one of the largest public offerings
of a company in history. Today, Facebook filed papers with the Securities and Exchange Commission
to raise some $5 billion and take the company public. To walk us through all that, we turn
to Nate Elliott, principal analyst for interactive marketing at Forrester Research. He joins
us from the Nasdaq market site studios in New York. And Steven Levy is a senior writer
at Wired magazine. Steven, I will start with you. Today’s filing finally offers a kind
of window inside Facebook’s business. I know it just came out. You have got just a quick
look, but what jumps out at you right away? STEVEN LEVY, Wired: Well, a couple of things.
The revenues were pretty much in line with what people were thinking. They had somewhere
south of $400 million of annual revenues and a profit of $1 billion, which is pretty nice.
One thing is that all the money they have is in advertising, except for about 15 percent,
and almost all of that is they have a payment system which is dependent on one company,
the game company Zynga. And that was kind of interesting there. The other thing that
struck me was the very striking letter from Mark Zuckerberg, the letter to potential investors,
where he talked about how the company’s mission is more important than making money to him.
The money comes — enabled him of fulfill the mission of putting the world in contact
with each other, and doing it by the hacker way, as he describes it. That was pretty interesting.
JEFFREY BROWN: I want to come back to that letter in a moment. But, first, Nate Elliott,
fill in a little bit more of the business model, the advertising. How does Facebook
make its money? You look at a moment like this, when everybody is trying to figure out
how much it’s worth. How does it, to use that ugly word, monetize all this information that
it gathers? NATE ELLIOTT, Forrester Research: Yeah. Well, what they’re doing right now is
selling advertisements against the people who visit their website. So, it’s what I would
call a nice little business. It’s a pretty basic revenue model. But they’re selling ad
badges to advertisers. And the good news for Facebook is they have got 800-plus million
people who come to their site every month, 400 million-plus per day. And so even a nice
little business like that across 800 million people turns into several billion dollars
in revenues. JEFFREY BROWN: You say it’s a nice little business. So, what — is there
a plan that jumps out now as a way to make it into an even bigger business as a public
company? NATE ELLIOTT: Yeah, I think there are two steps there. And the first one, Facebook
clearly sees, and the second one, we have to hope that they see. The first one — and
they talk about this in the filing today — is that they know they need to make the ad platform
on their own website better. They need to provide more value to the marketers who are
spending money on Facebook.com right now. But, again, that’s a revenue model that’s
been around for a while, selling ads on your own website. And what Facebook needs to do
to really transform its business and to become the company it wants to be is find other and
better ways to use its data and to transform advertising elsewhere online, to power ad
targeting and make advertising more effective, not just on its own website, but on lots of
other online properties. JEFFREY BROWN: Well, Steven Levy, what would you add to that, about
how it uses the money that it now raises, that $5 billion? And does that inevitably
sort of butt up against a lot of the questions that people have asked about it from the beginning,
how it uses information that many people, 800 million people, give it for free? STEVEN
LEVY: That’s right. It really hasn’t cracked the problem that Google cracked in its early
days, which was a novel way to make money which was really in sync with what the users
wanted there. Facebook is unique in that it could really micro-target advertisers — or
customers for advertisers. If you are living in Memphis, Tenn., and you just got engaged,
Facebook knows that, and can sell an ad to the bridal shop in Memphis. And, you know,
they also could sell to a broad audience of the 800 million people there. But what they
haven’t done is done it in a way where users hunger to see those ads and want to see them.
And the one time it tried to go outside of Facebook to the Web for the advertising was
when it had a program called Beacon, and that didn’t work out too well. So they still have
a ways to go there, particularly in the mobile space, which they note in the IPO. JEFFREY
BROWN: Now, Nate Elliott, set up a little bit more of the context here. I know the filing
mentions a lot of the potential risks to the company going forward. It says, for example,
that they’re fighting off a challenge from Google, which the world watches. It talks
about problems in China. It talks about being hounded still by privacy concerns. What — spell
that out a little bit more for us. What kind of risk do they face? NATE ELLIOTT: Yes. Well,
I don’t know if they have problems in China, because they’re not in China. (LAUGHTER) JEFFREY
BROWN: Yes, that’s what I meant. NATE ELLIOTT: The problem is, they need to figure out whether
they want to be there and find out if there’s sort of a halfway solution, where they can
operate out of Hong Kong, perhaps, in the way that Google has been doing for the past
couple of years. When you look at their user growth, it’s slowed down quite a lot. They
announced 800 million users many months ago, and they’re only at 800 million and change
right now. The good news for them is the users are becoming more and more active. And daily
user growth is outgrowing or outperforming monthly user growth. So they’re doing a great
job of getting the users who are on the site more actively engaged and coming back more
often. But if they want to keep the overall user numbers going up, they need emerging
markets. And they note in the filing that a lot of the growth is coming from markets
like India and Brazil. China is the untapped market for them. And we already see millions
of people in China using Facebook, even though it’s illegal to do so. And we know if they
flip the switch, that there will be many, many millions of people in China who want
to use Facebook. So they need to make a decision. Are they willing to play by the Chinese government’s
rules in order to take advantage of potentially hundreds of millions of new users in that
market? JEFFREY BROWN: Now, Steven Levy, come back to that letter from Mark Zuckerberg,
and a lot of language that I saw about the mission. It says it wasn’t originally built
as a company, but — quote — “built to accomplish a social mission, to make the world more open
and connected.” We saw this with Google with its famous model, do no evil. Is there a point
where these companies, the idealism, original idealism kind of runs up against, well, the
demands of the marketplace and shareholders? STEVEN LEVY: Right. Well, that’s a definite
danger of any company as it get bigger there. And do I think that — before we jump to the
cynical side and point fingers at Zuckerberg and Facebook, we are on the cusp of something
different here. This social networking — and Facebook is the flagship of that — has changed
our world. And that’s really where it’s positioning itself — and Zuckerberg is very explicit
about this — in the center, of changing the way we communicate with each other, changing
the way we communicate with our governments — he says that in the IPO — and doing it
in this idealistic, hackerish way, and hacker not in the break-in sense, but in the best
sense, like I wrote in a book 27 years ago. And I think that there’s something to that,
that it has changed it. And before we start pointing fingers and saying, oh, my God, you
ve turned your back on that, you’re violating our privacy, it is something that could be
of benefit to people there. So I think, on their IPO, at least, we shouldn’t stomp on
them. JEFFREY BROWN: All right. We’ll watch what happens. This takes place over the next
few months. Steven Levy, Nate Elliott, thanks so much. NATE ELLIOTT: Thank you. STEVEN LEVY:
Thank you. urn:schemas-microsoft-com:office:smarttags country-region urn:schemas-microsoft-com:office:smarttags
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