History will record that Mark Zuckerberg wasn’t the first college student to have the idea of enabling people to set up Web pages and share stuff with their friends. Yesterday, my colleague Silvia Killingsworth wrote about the Winklevoss twins, two Harvard grads who famously accused Zuckerberg of stealing the idea for Facebook while working on their fledgling site Connect U. Before the Winklevii, there were the folks behind MySpace and Friendster. And before them, way back in 1995, there were Todd Krizelman and Stephen Paternot, who launched TheGlobe.com from their dorm rooms at Cornell.
TheGlobe.com allowed people to create their personal space online, upload pictures, and set up what came to be known as blogs. By 1998, it had more than two million members, which was then considered impressive. It also had a business plan: sell advertising. On November 13, 1998, Bear Stearns issued 3.1 million shares in the company at nine dollars each to some of its clients—the lucky ones. When Bear’s traders tried to open the stock for trading, they found it difficult to establish a floor price. As I recalled in my 2002 book, “Dot.Con: The Greatest Story Every Sold” (apologies for the plug):
TheGlobe.com’s I.P.O. marked the beginning of the dot-com bubble’s epic stage. By the time the bubble burst, in March and April, 2000, hundreds of online firms had issued stock, among them many clunkers like Pets.com, E-Stamp, and etoys.com (not to be confused with a later company that used the same name), but also many online companies that survived and eventually thrived, such as eBay, Amazon.com, and Priceline.com. The bursting of the bubble discredited the term “dot-com,” which was understandable but, in a way, unfortunate, because the term itself had come to be the expression of an attitude that saw in online communication and online commerce boundless possibilities. Facebook’s I.P.O. represents a return to that mindset. It’s the fulfillment of the dreams of the nineties—and a reminder of their potentially fatal attraction.
While the term “dot-com” disappeared, the idea survived. Before very long, it was rebranded as “Web 2.0”—a term popularized by Tim O’Reilly and John Battelle, who from 2004 onwards organized a series of conferences under this banner. Supposedly, what distinguished Web 2.0 from Web 1.0 was user control, and user collaboration, with the network serving as a “platform,” but that wasn’t really a new idea: Krizelman and Paternot had fastened upon it years earlier, as had the founders of GeoCities and other Web-hosting ventures.
What really got Web 2.0 going was the proliferation of broadband connections, the invention of top-notch search engines (Google), and the creation of idiot-proof tools for doing fun stuff online, such as sharing photos and videos, posting blogs, and creating mashups. By February, 2004, when Zuckerberg launched Facebook, the elements were in place for the Web to fulfill the hopes of the late nineties—or some of them, anyway. But if Zuckerberg was in the right place at the right time—nobody should underestimate the role that the “Harvard” brand played in Facebook’s initial growth—he seized the opportunity ruthless and brilliantly. Now, seven years later, he is about to become a billionaire many times over by selling (non-voting) shares in what is, in many ways, the ultimate dot-com.
Back in the late nineties, I used to read a lot of S-1s—official investment prospectuses produced by companies about to issue public shares for the first time. Delving into Facebook’s S-1, which it has amended repeatedly since February, when it put out an initial version, felt like old times. The numbers were different (by an order of magnitude) from those that the original dot-coms used to put out, but the basic story was the same one that had led to all those bad investments and broken dreams: a Web site expanding this fast, with this many eyeballs focussed upon it, has simply got to be worth a lot of money.
Certainly, Facebook’s growth has been astonishing. As of March 31st, some nine hundred million people—about one in eight of all the humans on the planet—used the site at least once a month. More than five hundred million people—about one in thirteen of the global population—used it daily. Every day, Facebook users upload about three hundred million photographs and generate about 3.2 billion “likes” and “comments.” People on Facebook have a hundred and twenty-five billion “friends.” For many of us, Facebook has become a part of daily life. Many use it to keep up with friends; some use it as a news service; I’m in the camp of those who utilize it mainly as a professional tool. (Once I put up this post, I will link to it on my page.)
Compared to the late nineties, there are some basic differences, of course. Unlike many of the original dot-coms, Facebook makes money—quite a lot, in fact. It sells advertising and also charges other firms that use the site to drum up business, such as the gaming company Zynga and the music service Spotify. In 2011, on revenues of $3.7 billion, Facebook generated a billion dollars in profit. In the three months to March 31st, it made another two hundred million dollars.
That’s reassuring, but does it justify a valuation of a hundred billion dollars? That’s what the company will be capitalized at if the underwriters, led by Morgan Stanley—another echo of the late nineties—price its stock at the upper end of the $34-$38 range they indicated on Tuesday. If the stock goes up when trading starts, and it almost certainly will, Facebook will be even more highly valued. While I don’t think Facebook’s stock will enjoy the sort of crazy leap that TheGlobe.com’s took, I wouldn’t be at all surprised to see it close over fifty dollars, which would value Facebook at more than a hundred and twenty-five billion dollars.
For such a figure to make sense, given the risks attached to the technology industry, you have to assume that, within a few years, Facebook will be making not a billion dollars a year in profit but five billion dollars, or ten billion dollars, or even more. Apple, the world’s most valuable company—its market cap passed six hundred billion dollars briefly last month, and is currently hovering at a little more than five hundred billion—generated more than twenty-five billion dollars in profits last year. Microsoft, which is valued at less than half of Apple, made more than twenty-three billion. Google, valued at about two hundred billion, made nearly ten billion.
If it is to compete with these giants, Facebook will need to find a much better way to monetize its vast user bases. At the moment, it generates barely four dollars a year in revenues per user, primarily in the form of charging fees to advertisers. Maybe it can gin up more of these revenues, but there are still questions about the effectiveness of ads on social-networking sites. General Motors’ decision to pull its advertising from Facebook, which was announced yesterday, is hardly encouraging. Neither is the fact that Facebook still hasn’t properly figured out how to deliver ads to mobile users.
Simply relying on attracting more and more people to the site won’t do the trick. As the site’s audience approaches the saturation point in many advanced countries—more than sixty per cent in the U.S. and the U.K.; more than eighty-five per cent in Chile, Turkey, and Venezuela—its rate of expansion is inevitably slowing down. Between March, 2009, and March, 2010, the number of monthly active users rose a hundred and fifty-four per cent. Between March, 2011, and March, 2012, the growth rate was forty-one per cent. Quarterly figures confirm the slowdown. In the first quarter of 2010, the growth rate was 26.5 per cent. In the first quarter of this year, it was 8.9 per cent.
Another disturbing sign—and one very familiar to students of the dot-com bubble—is that Facebook’s costs are rising considerably faster than its revenues. Between the first quarter of 2011 and the first quarter of 2012, as it hired more engineers and sales people, and continued to invest in the site, its costs shot up ninety-seven per cent. Revenues rose by forty-five per cent. Consequently, Facebook’s profits in the three months to March were actually lower than they were a year earlier: two hundred and five million dollars compared to two hundred and thirty-three million.
None of this necessarily means that Facebook will be a bubble stock, or that it will meet the same fate as TheGlobe.com, which saw its market capitalization shrink to virtually nothing in 2001 before it closed down for good in 2008. Despite the recent slowdown in its growth, Facebook is an innovative, profitable company, which has established a unique and ubiquitous online presence that it may be able to exploit in ways that nobody, not even Zuckerberg, has yet dreamed of. I’d be willing to bet that in ten years’ time Facebook will still be around, and it will be a big player on the Web.
But how big? In Silicon Valley, many people view Facebook’s Web site, and its trove of user data, as the next key technology platform, something akin to Microsoft Windows and Apple iOS, which the company will leverage to create its own economic ecosystem—one that generates huge monopoly rents. Perhaps this will happen. For now, though, Facebook is basically an online media company, and there are some legitimate questions about its prospects. In purchasing its stock, as with buying the original dot-com stocks, investors will be laying out their cash primarily on the basis of hope and optimism rather than a clearly defined and firmly established business plan.
To me, at least, that has echoes of the past.
Photograph of Paternot and Krizelman, in 2001, by Fred R. Conrad/The New York Times/Redux.
