The End Or the Beginning of Facebook?

How on Earth can people put a price on something like Facebook? It isn’t even a company – it’s some kind of hybrid-corporation! In fact, if we would look at Facebook the same way we look at all other public listed companies, the face value of the Facebook shares would be zero. The shareholders have nothing to say when it comes to managing the company. The advertizing isn’t going that great, either. So why is the stocks trading at nearly  50 times estimated earnings? Well, investors are starting to turn away from Facebook, too…

“This may be the start of an ongoing trend.”

MarketWatch

Mark-Zuckerberg
Social media alternatives to Facebook are increasing as users discover more networks that fit their needs. Financial Times reported a couple of days ago that investors are turning to alternative social media networks, and that Facebook is no longer at the top of the list. Benchmark Capital and Greylock Partners are two recent examples of companies that are branching out beyond Facebook. MarketWatch reports that Facebook lost 1.4 million users in December, and that this may be the start of an ongoing trend.

So, will it turn out that Facebook is just another hype, after all?

That is, of course, too early to say, but let’s have a look at some of the stuff that’s been reported about Mr.Zuckerberg and his gigantic Facebook lately.

3q5tctBloomberg reported on Feb. 12 that David Sze, who was an early investor in Facebook and LinkedIn, has decided to support the startup Nextdoor. And the Financial Times lists Nextdoor and Snapshot as two recent competitors.

But also other networks, that  have been available for several years, and are now seeing growth among their users.

Orkut, Google’s social network, has 33 million users around the world and is still one of the most popular networks in Brazil and India.

Zorpia, founded in 2003 by Jeffrey Ng, has grown to 26 million users while expanding its features to include photo albums and online journals in addition to social networking.

Badoo has grown to 121 million users and has reached 180 countries.

It seems clear that the gap between alternative networks and Facebook is beginning to get smaller – and investors are noticing this.

Although Facebook is not disappearing and will continue to attract users, its growth in certain markets is being stalled.

Facebook is still banned in China and other countries. Despite the ability of some users to get past the block, the ban has allowed alternative social media networks to flourish. Facebook is apparently slowly beginning to lose users. Facebook lost 1.4 million users in December, according to MarketWatch. And this may be the start of an ongoing trend, the financial web site says.

Where Is the Money?

Facebook did make profit last year, ($1,1 billion), but certainly nothing to brag about.

cap-invsIn spite of the many creative attempts to squeeze in more advertizing, it just won’t fly. The key argument for why Facebook can’t make money is that its ads are just like any other ads on the internet; and that unlike Google’s ads, which are tailored to your internet searches, Facebook’s ads don’t answer a need that you have at the moment you see them.

Operating profit was actually slightly lower in 2012. Facebook increased spending on research and development, raised headcount by 40 percent over the course of a year and lifted capital expenditure by 45 percent. And additionally; the firm says it will increase investments in areas like search further, and spend more on information technology infrastructure this year.

The social network’s bills jumped about 80 percent in the fourth quarter of 2012 — it’s twice as much as the top line grew. That is quite worrying from an investor’s perspective.

Mr.Zuckerberg have many options at the moment for the future strategy of Facebook. But there’s a catch here. too…

One-Man Show

He may – in theory – do the most insane, company-killing things, and nobody can stop him.

file mzYou see, he isn’t accountable to his board of directors, for some rather unclear reason.

The separation of ownership and control is integral to the operation of modern financial capitalism, but typically the CEO works for the shareholders, at least that’s the principle.

With Facebook that’s not the case. Facebook is entirely Zuckerberg’s. There are two classes of shares, Zuckerberg controls 57 percent of the votes – and that’s all the votes he need. And any time any non-Zuckerberg owner of class B sells shares they convert to class A status and Zuckerberg controls the company even more firmly.

What’s more, at the time of the IPO, Mr.Zuckerberg stated his intention to avail himself of the company’s status as a controlled entity to eschew any independent participation in the selection of directors.

In other words, it’s his company from top to bottom, and anyone else who owns shares is just a silent partner.

Zero Value?

But here’s the most intriguing part:

Facebook-share-priceI assume Mr. Zuckerberg would rather have expensive Facebook stocks than cheap ones. It represents a lot of wealth for him. He’s a rich guy, and rich guys are free to exchange wealth for other things they might enjoy.

But very few people live their lives with wealth-maximization as their exclusive goal, and if  Mr.Zuckerberg doesn’t want to maximize Facebook’s financial value nobody can make him.

Not the board, not the shareholders. And if he should decide that the company should not pay any dividends to shareholders (or even make some kinda statement that may reveal intentions to not pay any dividends), then the face value of Facebook is – at least theoretically  - zero.

Just the fact that the possibility exist, may be one of several reason to why investors are looking for other alternatives amongst the social media.

World Dominance?

Meanwhile, let’s change the perspective for a while.

I know this can be a bit difficult to understand for investors with a traditional mindset, but it isn’t always about the money. It may also be about strong influence and pure power. Something that’s not easy to put a prize tag on.

But it’s definitively worth something. Specially if you can control the most influential network in the world.

facebook-world-dominance

This is also in in with what Mr.Zuckerberg said in January, when presenting th Q4 report:

 “We made the decision to continue to grow our headcount quickly in 2013, particularly in product development. This will likely cause our expenses to grow at a faster rate than we expect to grow our revenue this year, which means that we aren’t operating to maximize our profits this year.”

And that may very well be the Grand Master Plan of Facebook; first ensure an almost total world dominance, and the start thinking about how to make money.

So, why not do all the necessary investments now, while the company still can avoid paying taxes?

Home Of Exploits

Facebook has always been, and still is, a favorite target for hackers and cyber criminals.

facebook-giftBut the company have taken a few shortcuts before, and their latest trick is to exploit a loophole in the US tax system that entitles Facebook to a net tax refund of $429 million for the last fiscal year, according to a new report by the organization “Citizens for Tax Justice,” Reuters reports.

 “Facebook is also carrying forward another $2.17 billion in additional tax-option tax breaks for use in future years,” the report states.

That makes Facebook’s current and future tax reductions up to a total of $3.2 billion.

You could crush a lot of competition with that kind of money!

Related by econoTwist’s:

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All Human Rights Reserved (h) 2013

3 thoughts on “The End Or the Beginning of Facebook?

  1. Pingback: Zückerberg: US Government Is A Threat To Internet | Rational Arrogance

  2. Pingback: Happy Birthday Facebook! | Rational Arrogance

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