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Of Privacy & Profits: The Facebook Frenzy

by Sigmund Leominster
Published February 6, 2012

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In a stalled economy or a global recession, news about people spending huge amounts of money is typically always welcome. So as millions of people world-wide are struggling to find jobs, even food, it’s good to know that folks are still buying iPads, Kindles, and all the other necessities of life.

And for people who have lots of money, such as investment bankers and venture capitalists, the news that you can now buy a piece of Facebook for a mere $5 billion has encouraged a media feeding frenzy that makes it sound like Mark Zuckerberg’s long-awaited Initial Public Offering (IPO) is the most exciting and important business news of the century. Of course, it isn’t, but one should never let the truth get in the way of a good story.

The hype is more to do with the fact that a significant number of people have a personal stake in the company, even though it’s at the user rather than financial level. Oddly, users of Facebook actually do feel as if they “own” the company, which is apparent when you read about the backlash against such things as “changes to the interface,” “sharing data” and “forced timelines.” In reality, the only choice you have is either to use Facebook or not. The other truth is that Facebook is not there to make your life easier but to generate profits for the owner – or owners. For some reason, many people find this a hard concept to grasp but it’s the basis of all successful businesses.

So the shift from being a private company to a public one has been triggered by the perceived opportunity to create more wealth for more people. More precisely, it’s predicated on the assumption that if you give Mark Zuckerberg $5 billion, he’ll give you back somewhere between $45 and $95 billion. Why? Because Facebook was last valued at being worth $50 billion dollars and is likely, according to some, to be worth $100 billion. [1]

The math is easy enough; it’s Economics 101 – or Vegas 101 depending on your point of view. Buying shares in a business is not that much different from gambling, it’s just that in business we have “investors” and in gambling “gamblers.” Mind you, there is a significant difference in that anyone can walk up to the Blackjack table in a casino but not everyone can buy shares in a company. In the first instance, an IPO is not, in truth, public; it’s a release of information and intent to sell. The first people who get to play with money are the banks that a company uses to help them set a price. In the case of Facebook, Morgan Stanley is one such bank, but there will be others. [2]

Facebook CEO Mark Zuckerberg - image courtesy of "The Hollywood Reporter"

These folks also get first chance to offer shares to their big customers, those companies with deep pockets and expert analysts. By the time the average Facebook user gets the opportunity to own a piece of the company, up to 90% of the shares may well already have been spoken for. This isn’t to suggest that buying shares would be a bad thing, and the jury is still out on whether the small investor should be adding FB to their portfolio, but you’ll have to get in line to grab a piece of whatever is left after the large corporate investors have taken their slices of the pie.

Another big unanswered question that some of us will be wanting to know is how much personal information is going to be shared around once Facebook goes public. The chances are that the amount of sharing will be going up and not down. Why? Because one of the biggest and most controllable ways that Facebook makes money is through advertising [3], and increasing that is key to increasing profits. When you answer to yourself and colleagues as a private company, it’s easier to have a conscience about privacy, but when you answer to shareholders whose concern is margin, money, as ever, talks. And targeted advertising is a good way to get more bang for your buck.

Basically, if you spend your time on Facebook talking about your vacations, travel agencies would love to send you ads about what they have to offer. If you are posting about your new baby, the nice people at Pampers would fall over themselves to make sure you see their products on your home page. Both of these actions require that sellers know who you are and hence can send you the right adds.

Is this really a concern? For privacy activists, it is. But for Mark Zuckerberg, and apparently the majority of younger people, it isn’t. Just over a year ago, Zuckerberg summarized his views on privacy as follows;

People have really gotten comfortable not only sharing more information and different kinds, but more openly and with more people. That social norm is just something that has evolved over time.”

It’s hard to argue against this when you can simply read what people write about on Facebook and how much information they give away about themselves freely. There’s little need to tap someone’s phone to find out what they are doing – just check out their Facebook page! And it’s not a new phenomenon; worries over privacy online have been decreasing for over two years. An article in New York magazine way back in 2007, the following snippet describes the typical attitude of the “older” generation to their offspring;

Kids today. They have no sense of shame. They have no sense of privacy. They are show-offs, fame whores, pornographic little loons who post their diaries, their phone numbers, their stupid poetry—for God’s sake, their dirty photos!—online. They have virtual friends instead of real ones. They talk in illiterate instant messages. They are interested only in attention—and yet they have zero attention span, flitting like hummingbirds from one virtual stage to another.” [4]

These folks are also the consumers of Facebook; the target audience of the soon-to-be-public largest social media portal with an estimated base of almost one billion users. It’s numbers like that which catch the attention of investors and if increasing those means taking more liberties with the privacy that people don’t really seem to care too much about, you can guess which way the investors will go.

And you, too, could be an investor.

Sources
[1] The range appears to be from $50 – $125 billion. Wall Street Journal, February 3rd, 2012
[2] The official list is Morgan Stanley, JPM, Goldman, Bofa, Barclays, Allen&Co. Wall Street Journal, February 1st, 2012.
[3] An estimated 86% of revenue comes from advertising. Fast Company, February 1st, 2012.
[4] Say Everything by Emily Nussbaum. New York, February 12th, 2007.

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