In my previous posts, I suggested that Facebook (Nasdaq: FB) should offer an ownership stake -- sweat equity -- to all its customers (aka pretty much everyone). Compensating and incenting the people who actually do the "work" with equity just makes good business sense, as proven by the fact that employee-owned companies consistently outperform peer firms.
This insight is all the more crucial in the case of Facebook, where the product is the end-user customer/worker/developer. Failing to deliver a quality product, which equates to producing content that is mundane, thoughtless, uninspired, irrelevant, and meaningless, is Facebook's most significant business risk.
When the quality of "sharing" degrades to the point that customers keep the interesting and useful stuff to themselves, then there will be few nuggets to populate the data warehouses of the Procter & Gambles of the world.
When customers get lazy and opt for informational quantity over quality (a problem Facebook has already identified), then what to do with all this information becomes a much more serious matter. What would Facebook do with enormous mounds of cybergarbage?
This is one reason Facebook's superhyped IPO, set in every way to replicate past IPO setaside programs for the wealthiest investors, is a strategic error. Equally important is the fact that rewarding a paltry number of wealthy "qualified" investors does nothing to support Facebook's business model, which hinges on vast numbers of continually prolific users.
Furthermore, I would venture to guess that time spent on Facebook decreases as income increases. The likelihood of trading true leisure (beach sojourns, for example) for the work of Facebook sharing and caring is pretty small for those with high net worth. In contemporary words akin to those purportedly said by Marie Antoinette, let them Facebook.
Again, offering equity ownership as a direct incentive would be an incredibly savvy business move. But what about the practicality, the actual ability, and the wherewithal to execute this move? Really, how would the company logistically deal with 845 million small investors?
If you can send 845 million people a virtual box of chocolates through the Facebook portal, then incrementally distributing stock doesn't seem so crazy after all. (In relationship, the chocolates really do sound crazy.)
What is also not crazy: Democratizing investment in technology and capital, especially the kind with a fairly predictable revenue stream, would do more to improve the world economy than increasing/decreasing taxes, cutting/making work, or buying/selling real estate.
Now we bring up the issue of government. Yes, it is true that the SEC doesn't allow more than 500 people, let alone 845 million, to participate in the really choice profits that come before the bell. But hold on to your computer. Government, in this area, is rapidly changing. For all the complaints lodged at politicians and regulators, the work on this issue by the House Subcommittee on Capital Markets -- from taking thoughtful testimony to reasonably planning for unanticipated consequences -- has been excellent up to this point.
The subcommittee really should post its work on Facebook. But in case it doesn't, I'll cover the topic right here instead.
My thoughts reflect the fact that I view Facebook most like a utility (another way to first find people, then communicate--like email, telephone, cell phone, text messaging; because one end of the conversation uses the utility, the other must use it too).
For utilities that are structured like cooperatives today, all users receive a dividend, with heavier users receiving a higher dividend. Why wouldn't this work?
It is interesting to note that even fairly large cities, Boulder CO for example, have found residents voting to move the municipality away from the large monopoly utility provider to the urban equivalent of the rural electric/telephone/internet cooperative.
I draw on this example because there are clear parallels, given that Facebook today is a monopoly, simply on the premise of market share. Some have argued the other entrants like Google+ will change this, but I think the market will then look like an oligopoly. Other small niche entrants will pick up some vertical markets that are subsets of the whole, but this will not fundamentally change the structure of the market--defined as generic, simple-interface, mass-market communications utility.
With telephony, the barrier to entry was physical infrastructure. Now it is market penetration and the personal/professional cost of backfile conversion. Most important, if others use it, you must use it too (imagine saying the equivalent: don't call me, I don't have a phone)?
For the purpose of discussion: is there any possibility that Facebook's market could be cannibalized in the same way that land line technology has largely been by cell technology? What could be the innovation that they could conceiveably not see coming?
All the user metrics can be easily tracked. So you can base the differentiation by number of user visits per day, friends, number of times they tag a friend's location/photo, etc.
And by the way, for many casual users of FB -- myself included -- these "power users" are one of the reason to stay AWAY from FB. Bunch of privacy leeches!
The other thing to consider: Not all Facebook users are equal.
The Pew Research Center found that thanks to a group of "power users" — about 20% to 30% of people on the site — the average Facebook user is more likely to receive friend requests than send them, receive positive feedback on their posts with the "like" button and be tagged in photos than upload them themselves. Those users are also the ones that help pushed Facebook to what could be the biggest initial public offering in history later this year, because of the massive amount of data of users' preferences, activities and habits that they help the site collect, The Associated Press pointed out.
So assume for a moment that Facebook would launch a scheme to reward users. Should everyone be rewarded equally?
This discussion is quite interesting. Emotionally I will vote as you guys. But practically, I'd say we are mixsing two different groups here. We are talking about share holders and customers. Those two groups are caring completely different things. The share holders want profit, while customers care a good product/service. So what's the point to share IPO in these two groups. Do we suggest Facebook uses IPO share to buy customers?
As a general custmer, he/she just want a good product/service. If he/she wants money, they can do their own investment.
So, I don't see these two bond together is good idea for Facebook.
It's an interesting idea though, very good topic among friends. And I don't mean offense to anyone.
Scott, During the bubble (this time, Web 2.0), many investors will sneer at normal valuation yardsticks.
Take a look at what happened at LinkedIn. Last quarter LinkedIn announced to issue more shares, which will double the outstanding shares. Traditional wisdom is the stock price will drop by half. No, the stock actually rised from low 60s before the report to about $80 today. Maybe Wendy's valuation has some merits.
Another way to look at it: Facebook has roughly 5B equity, 845M Monthly Active User (or 900M as Scott pointed out). Give $5 for every MAU, Facebook will run out of equity as a company. :)
Let me put aside the word "dilution" just for the moment and focus upon the business objective, which is preservation of fair value for exising investors, not to be compromised by newcomers.
At any time, $100 raised from 100 people $1 at a time is the same $100 raised from one person (cost issues aside). There must be a way to mathematically reflect this particular issue.
The other issue: if $1 buys a share today, we have to reflect that the present value of this investment today should be less than $1 invested last year. This is considering time value of money and risk.
As the deal is structured today, even though additional shares are being issued (inevitably dilution) existing owners of FB stock had to be satisfied by dealmaker Morgan Stanley that the value of their stock is not being sacrificed to bring new investors in--that their cost basis relative to new investors reflects a fair and higher PV (back and forth negotiation for sure). This is reflected in the valuation and the offering price as calculated, and is not dependent upon what happens after the bell.
Keeping the integrity of the transaction means keeping these ratios intact, which is possible even if the number of investors changes.
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Facebook hasn't identified the link between investment and strengthening its core business. Doing so means recognizing its core business is nothing but its corral of customers.
The Customer Stock Ownership Plan (CSOP) was the brainchild of Louis Kelso, the inventor of the Employee Stock Ownership Plan (ESOP). But now the term has been co-opted by a company called Loyal3.
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