Facebook’s Business Model

Before you go out and buy that Facebook stock when it IPOs today, consider the warnings. There are plenty of opinions out there. But the best consideration of the whole matter I have read in the last two weeks comes courtesy of Chris Dixon, who considers Facebook’s business model. Namely: display ads. Display ads generally hurt the user experience, and are also not very efficient at producing revenues. The crux of the matter:

The key question when trying to value Facebook’s stock is: can they find another business model that generates significantly more revenue per user without hurting the user experience? (And can they do that in an increasingly mobile world where display ads have been even less effective.) Perhaps that business model is sponsored feed entries, as Facebook seems to be hoping (along with Twitter and perhaps Tumblr). The jury is still out on that model. Personally, I have trouble seeing how insertions into the feeds aren’t just more prominent display ads. You still have to stoke demand and convert people from non-purchasing to purchasing intents. A more likely outcome is that Facebook uses their assets – a vast number of extremely engaged users, it’s social graph, Facebook Connect – to monetize through another business model. If they do that, the company is probably worth a lot more than the expected $100B IPO valuation. If they don’t, it’s probably worth a lot less.

Chris’s short post is worth reading in entirety.

The Decline of the Public Company

As Facebook debuts its IPO today, a good reminder at The Economist on the decline of the public company:

The number of public companies has fallen dramatically over the past decade—by 38% in America since 1997 and 48% in Britain. The number of initial public offerings (IPOs) in America has declined from an average of 311 a year in 1980-2000 to 99 a year in 2001-11. Small companies, those with annual sales of less than $50m before their IPOs—have been hardest hit. In 1980-2000 an average of 165 small companies undertook IPOs in America each year. In 2001-09 that number fell to 30. Facebook will probably give the IPO market a temporary boost—several other companies are queuing up to follow its lead—but they will do little to offset the long-term decline.

So why is Facebook going public, anyway? It’s not like it needs to raise the cash.

Mark Zuckerberg has resisted going public for as long as he could, not least because so many heads of listed companies advised him to. He is taking the plunge only because American law requires any firm with more than a certain number of shareholders to publish quarterly accounts just as if it were listed.

 

Bloomberg Billionaires Index

With Facebook set to IPO on May 18, with the share price set in the $28 to $35 range, Bloomberg has now updated its Billionaire List to reflect Mark Zuckerberg’s wealth at $17.6 billion.

It’s kind of ridiculous, but this billionaire index is updated daily. For instance, here are today’s top 40 wealthiest people according to Bloomberg:

NAME EST. NET WORTH CTRY $ CHG DAILY % CHG YTD
1. Carlos Slim Helu $ 75.0 billion MEX $ 65.5 M 21.7
2. William “Bill” Henry Gates III $ 63.2 billion USA – $ 394.8 M 12.7
3. Warren E. Buffett $ 45.4 billion USA $ 12.2 M 6.1
4. Ingvar Kamprad $ 42.5 billion SWE – $ 570.0 M 14.6
5. Bernard Arnault $ 42.2 billion FRA $ 234.2 M 19.6
6. Amancio Ortega Gaona $ 38.3 billion SPN $ 716.3 M 9.8
7. Lawrence “Larry” Joseph Ellison $ 37.2 billion USA – $ 377.0 M 12.8
8. Charles De Ganahl Koch $ 35.5 billion USA $ 119.7 M 5.7
9. David Hamilton Koch $ 35.5 billion USA $ 119.7 M 5.7
10. Eike Fuhrken Batista $ 31.7 billion BRA – $ 84.6 M 40.8
11. Sheldon Gary Adelson $ 25.0 billion USA – $ 576.9 M 26.6
12. Christy R. Walton $ 24.7 billion USA – $ 35.2 M – 1.3
13. Li Ka-Shing $ 24.6 billion CHN – $ 169.1 M 11.0
14. Stefan Persson $ 24.0 billion SWE $ 379.8 M 10.2
15. Liliane Bettencourt $ 23.8 billion FRA $ 53.2 M 17.7
16. Jim C. Walton $ 23.4 billion USA – $ 6.9 M 0.1
17. David K.R. Thomson $ 23.2 billion CAN – $ 157.2 M 8.5
18. Samuel “Rob” Robson Walton $ 23.0 billion USA – $ 6.8 M 0.2
19. Michele Ferrero $ 22.6 billion ITA – $ 111.3 M 7.4
20. Alice L. Walton $ 22.4 billion USA – $ 6.9 M – 0.2
21. Karl Albrecht $ 22.0 billion GER $ 466.9 M – 1.6
22. George Soros $ 22.0 billion USA – $ 13.6 M 3.7
23. Mukesh D. Ambani $ 21.8 billion IND – $ 444.7 M 1.9
24. Jeffrey “Jeff” Bezos $ 21.4 billion USA – $ 95.4 M 30.5
25. Alwaleed Bin Talal Al Saud $ 20.5 billion SAU 0 18.2
26. Lee Shau Kee $ 19.5 billion CHN – $ 20.3 M 13.0
27. Alisher Usmanov $ 19.3 billion RUS $ 38.4 M 10.8
28. Cheng Yu Tung $ 19.1 billion CHN $ 87.6 M – 4.9
29. Lawrence “Larry” E. Page $ 18.9 billion USA $ 73.3 M – 3.9
30. Sergey Brin $ 18.8 billion USA $ 71.7 M – 3.8
31. Georgina “Gina” Hope Rinehart $ 18.7 billion AUS – $ 144.8 M – 7.5
32. Alberto Bailleres Gonzalez $ 18.6 billion MEX – $ 212.2 M 7.9
33. Rinat Akhmetov $ 18.1 billion UKR – $ 72.1 M 25.8
34. Lakshmi N. Mittal $ 18.0 billion IND – $ 227.7 M – 14.7
35. Iris Fontbona $ 17.7 billion CHL – $ 538.1 M 0.7
36. Mark Elliot Zuckerberg $ 17.6 billion USA – $ 2,900.0 M – 2.2
37. Azim Premji $ 16.3 billion IND $ 97.0 M 1.5
38. Jorge Paulo Lemann $ 15.8 billion BRA $ 20.8 M 28.8
39. Vladimir Lisin $ 15.8 billion RUS – $ 231.7 M 6.3
40. Steve Ballmer $ 15.4 billion USA – $ 38.3 M 17.5

Mark Zuckerberg is number 36 on the list, well ahead of Steve Ballmer.

On another note: this is a good article to read about the Facebook IPO.

Graffiti Artist to Make $200 Million from Facebook Stock

Facebook announced its IPO yesterday, in an effort to raise $5 billion (perhaps more), which will be the largest internet public offering ever. Many people who hold Facebook shares are poised to become millionaires overnight. The New York Times reports a story of one David Choe, a graffiti artist who painted murals on the walls of Facebook’s first offices in Palo Alto, California. He chose to be paid in stock rather than in cash. Now, he’s poised to become an ultra-millionaire, to the tune of $200 million or more.

Many “advisers” to the company at that time, which is how Mr. Choe would have been classified, would have received about 0.1 to 0.25 percent of the company, according to a former Facebook employee. That may sound like a paltry amount, but a stake that size is worth hundreds of millions of dollars, based on a market value of $100 billion. Mr. Choe’s payment is valued at roughly $200 million, according to a number of people who know Mr. Choe and Facebook executives.

Sounds like Choe has won the lottery (by comparison, a $380 million Mega Millions jackpot in 2011 had a cash payout of $240 million, the largest in the history of the American lottery).

On a final note, what is the artist’s advice for living? “Always double down on 11. Always.”