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On Friday, May 18, Facebook went public. Regardless of when you are reading this post, I would wager that discussion about the implications of the IPO still dominates the news about social media, with an emphasis on what happened, why it happened, and the implications for investors in technology stocks.
Clearly, what happened was an IPO that disappointed investors and the general public. The reaction to the dip in the stock price has been, and will continue to be, a combination of finger-pointing, fault-finding and calls for new regulations in the marketplace. And why shouldn't it? This speculation on Facebook's stock price has been a kind of parlor game for years.
But what have we learned from this event? My takeaway is a bit different from others. As someone who studies social media, I am struck by the vast differences between Facebook's valuation, which is an estimate of its total worth in dollars, and its value which, to me, is a qualitative measurement of the role that Facebook as a social medium plays in daily life. In other words, when it comes to Facebook, we are still trying to figure out two things: what they are worth to us, and how much they should cost. We have inaccurate measurements thus far, and this was a risk that no one seemed to factor into the IPO in a proper way.
Facebook by itself would be a great news story because its reach is so vast. It is estimated that there are 900 million Facebook users right now, with that number to top one billion by the end of 2012. It is difficult to think of someone who has not heard of Facebook and harder still to think of someone within a circle of friends that does not have a profile on Facebook. Add the prospect of measuring its economic impact and the story becomes rather large, in journalistic terms.
Yet I think that the news media tend to confuse valuation with value, probably because valuation is something that is easy to pin down because it can be quantitatively measured. It may also be tied to an inevitable discussion that has been taking place in the technology community, and the discussion begin with the question, "How do we make money off this thing?" (Also known as 'monetizing social media.")
This was the question that General Motors must have been asking itself just days before the momentous IPO when it announced that it would not be advertising on Facebook anymore. Even as pundits were questioning how this would affect the monetary valuation, I was more curious about the reasons why GM would abandon one of the largest and most influential social media platforms yet invented. The answer became clear to me almost right away: GM seems to feel that Facebook as a platform does not encourage an engagement with its audience that is sufficient to motivate them to purchase something That seems to be an extraordinary finding and somewhat puzzling at first glance. How could Facebook, with all its members, not be an attractive and engaging advertising buy?
I am inclined to think that GM made its decision because it did not like the numbers that it saw, and that its projected return on investment (ROI) would be disappointing. This is not to say that the right numbers for GM do not exist on Facebook. It merely suggests that Facebook has not yet found the numbers to explain its real value to GM.
To my way of thinking, this is the real problem with the Facebook IPO, and with social media in general: we still don't know enough about measuring them in a way that is exceedingly fine and persuasive. Not yet, anyway. We also have not sufficiently answered another question: is advertising on social media viewed as an intrusion into personal space that is not yet fully accepted?
Why do such answers elude us? Even as it seems that social media have been around forever, they still constitute relatively new experiences for us. We are still discovering how to measure their impact in our lives, still devising and revising our estimates in terms of numbers and dollars and friends. This is nothing new. After their introductions as new media, both radio and television took years before Arbitron and Nielsen made it possible to measure their audiences. And such measurements, despite refinements, are imperfect years later.
Advertising, like a IPO, is not science. There are risks and uncertainties inherent in the process that are ignored at one are ignored at one's peril. Even with the development of more accurate audience measurements, whether in terms of raw numbers of psychographic qualities, the ambiguities and margins for error will still exist.
Nonetheless, these uncertainties will not stop us from using Facebook because it adds real value to our lives, even as a valuation of that dynamic eludes Wall Street and, to some extent, ourselves.
Follow Eric Yaverbaum on Twitter: www.twitter.com/RealYaverbaum
Just by losing GM, 10 mil in revenues went out the web page. If advertisers slowed down or dropped off, then you can only fall back on that 15% or real stuff as an investment. Which once people have purchased it or the product becomes old, it will drop off. too.
Stocks value right now are based off to much Virtual Ads revenue that can be so easily Manipulated by people/programs to inflate the ads seen or clicked. That should make companies worried they are paying for something that's not really being seen by real peoples eyes.
All advertisers should drop ads on Facebook for 3 months and you will see what happens. Stocks will tumble or stockholders can each create 100 duplicate accounts and then use a program to run thru them to inflate the ad seen count and have it click links and see the stock prices rise as the advertisers pay more for the hits/links. All because of Virtual Data Manipulation.
Don't place money of virtual media that can be re-written or easily inflated.
And Im not alone
It takes time to get this right, and FB may have some work to do. The business decision makers in companies like GM want to know that they are getting their money's worth and the proof has to be traceable to them getting more market share, revenue or customer contacts that translate into sales. It is reasonable to expect results versus anecdotal evidence and this is no offense Facebook, but it may not be ready yet. This plays into the valuation if this is where the company expects its growth and revenue to come from.
GM probably recognized that Facebook was not succeeding as an advertising medium for "General Motors Automobiles."
When you are trying to advertise something, particularly an expensive-something such as an automobile, it isn't enough to merely get your advertisement in front of "eyeballs." Your objective is: to sell motorcars. Even if you are dumping your advertisement in front of the eyeballs of hundreds of millions(!!) of ... people who are not otherwise disposed to buy a new car ... you are merely dissipating your advertising budget. There's no correlation between the dollars you're spending and motorcars that are moving off the lot.
This might well be the key lesson-learned about Internet advertising in general. Yes, a site like Facebook can demonstrably attract billions of people ... but, it does so "for no particular reason." Per contra, other forms of media bring together well-defined demographics for well-defined albeit tangental purposes and thereby do represent a focused placement; hence, not dissipated. If you want to sell a Lamborghini or a Ferrari, buy into "Wine Spectator." Or a special-purpose focused web site. If you want to sell "routine" cars like GM's, buy time with Click 'n Clack. And so on.
A company with a proven ability to "reach" even billions of =dis=engaged people might in fact be next-to-worthless to a niche advertiser.