“You don't even know what the thing is yet. How big it can get, how far it can go. This is no time to take your chips down” is a quote from the movie The Social Network. This line was said by Sean Parker when discussing the future of Facebook. When Facebook announced its initial public offering (IPO) earlier this year the above quote took on a new meaning. Facebook will be forced to change itself to justify the valuation and thus the stock price to its new shareholders.
Facebook’s value is based upon the advertising and marketing data located inside of each user’s profile. The marketing and advertising data referred to is simply your personal contact information as well as data about your likes and dislikes. If you remember back to when shopping malls were the central location for consumer activity you may remember raffles for boats or other prizes which were taking place in the open areas. To win the boat all you had to do was fill out a sheet of paper with a few personal details. The reason the people running the raffle could afford to give away the boat was the value of the information you wrote down on the sheet of paper.
The information on the piece of paper was honest contact information because you wanted the boat delivered to the right address when you won, and most likely honest information about an unrelated topic such as your car purchasing habits. The people operating the raffle would take the entries and sell them as leads to third parties who might find the information valuable for marketing purposes. Fast forward twenty years to Facebook, which has become a place where people post all of their likes and dislikes and contact information. The same data that used to require enormous effort to extract is sitting inside of Facebook. The value of this data as marketing information is causing the estimated $95 billion valuation of Facebook.
$95 billion is an enormous valuation to justify given the revenue and the competition within the social network arena. The growing number of social networking sites and the reduction of privacy inside Facebook are two hurdles the founders of Facebook do not want to take on alone, and rightfully so because they did not invent a marketing product. However, Facebook has become too tempting for investors to leave alone any longer. Now the question is can the social network build the revenue streams in a manner which justifies the stock price.
The revenue streams for Facebook are the advertisements businesses can run inside the network, the value of the applications which are sold inside the network, and the value of the data which can be mined to generate search engine results. In an earlier post called Social Engine http://www.e-vos.com/2012/04/social-engine/; I explained how the search engine results are becoming connected to social media links, and the largest resource of these links is Facebook. Bing is currently mining links inside of Facebook which is the driving force behind the relationship between Facebook and Microsoft while Google is mining Google Plus. The issue for the search engines is the need for data to be public in order to legally mine it. The need for public data is why Facebook changed its structure and made it easy to display data to the world. However, not all of Facebook’s users are happy about the changes and many feel the reduced privacy is only the tip of the iceberg.
The reduced privacy presents the beginning of the metamorphosis Facebook must undergo to warrant the value to its shareholders. Whether online shopping will one day replace brick and mortar all together remains to be seen. However, the incorporation of social networking into advertisement placement and shopping recommendations represents an attempt to bring the social experience of brick and mortar shopping to a virtual world. Social networks such as Pinterest show the desire of consumers to be involved in online social shopping, but Pinterest users know what they are signing up for when they become users. Facebook users signed up for a social experience with their friends and family, so the question is will the users stay involved with the service if it is no longer free. Whether the cost is a monthly subscription fee or the sale of personal data to advertisers there will be a change in the service. The change may be slow or it may be quick, but the end result will be a drastic change from the social network for college students, and the quote from The Social Network of what Facebook really is will be answered.