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Yesterday Facebook announced its plans to IPO.
In the world of Tech this is a very big story.
Bernadette Young the Drive Presenter on ABC Gold Coast Australia interviewed me and asked me for comment.
Below is a transcript of the interview:
Bernadette Young: At 13 past 3:00, 13 past 4:00 across the border. It’s Bernadette Young with you this afternoon.
“Facebook was not originally created to be a company. It was built to accomplish a social mission, to make the world more open and connected.” Not my words, they’re the words of Mark Zuckerberg, the CEO of Facebook, a man who’s worth about $17 billion. He might not have intended to create a company, but a company it is, and it’s set to be floated on the stock exchange.
Facebook applied to have the company listed on Wall Street, but CEO Mark Zuckerberg wants you to understand their mission before you commit. Not that we, here in Australia, can really get into buying the shares, but that’s another story altogether. Keen tech‑watcher and CEO of Melon Media, Kevin Garber, has been watching this today very closely.
Hi, Kevin, how are you?
Kevin Garber: Good, Bernadette. How are you doing?
Bernadette: Yeah, good. Nice to have you back on “Drive.”
Kevin: Thank you.
Bernadette: I’ve been reading all the articles so clearly I care, and then I thought, “Why should anybody care?” Why do we care whether this company is on the Stock Exchange when so many companies who are a part of so many things that we do, whether it’s technology or the food we ate or the drinks we drink, are on the Stock Exchange? Why is everyone making such a fuss?
Kevin: Well, there’s a couple of reasons. I guess, though, the one reason is, “Will it affect Facebook as we use it, day to day?” but I think the more interesting reason is it’s quite a good time to take stock at what actually happened here, and the speed and the velocity of a company that has grown just so fast from nothing, and has impacted and changed our lives. Are we in a new capitalist stage? Has technology enabled something quite new and different on top of our traditional capitalist framework? [1:49] There’s two parallel questions going on. To answer your first question, I’ll just quote one of the CNN journalists, who said, “Simply becoming a multi‑billion dollar company changes the essence of its goals, activities and purpose. Its bloodstream becomes filled with cash, and cash has its own agenda.”
Suddenly Facebook is now tied into quarterly reporting. It’s tied into shareholder value. It’s now no longer a private company that can just experiment on the fringes and, yes, that is going to impact how it iterates on the service, and ultimately what we are presented with and have to play with, day to day.
Bernadette: Yeah. Kevin, I alluded to the words of Mark Zuckerberg. Those were the first two lines in a very long letter, a public letter, that he’s written. Well, I don’t know if it was meant to be public, but I’m assuming he didn’t mind that it is, if he’s planning to become so public, now that his company’s being floated. It’s nearly five pages long. At one point…
Kevin: I believe that one part of the actual filing is filed in a section, “Facebook’s Purpose.” Under that heading.
Bernadette: OK, yeah. It’s under “Facebook’s Purpose,” and it’s very much a, “This is what we value. This is what we do.” One of the subtitles is even “The hacker way.” The word “hacker” has an unfairly negative connotation from being portrayed in the media as people who break into computers. In reality, hacking just means building something quickly or testing the boundaries of what can be done. [3:16] I don’t think anyone’s ever really thought about Facebook as being hackers. What do you think he’s trying to achieve with some parts of this letter?
Kevin: It’s very interesting. It’s more of a manifesto than anything, and what’s quite interesting is before Google listed, the Google founders published a similar type of manifesto. The Silicon Valley culture of innovation, of trying to impact the world and solve big problems, it’s really the essence. The core of Silicon Valley is really not about making money. That’s an exciting byproduct, but all the discussion in Silicon Valley is often about solving big problems and changing the world. I think he really just wanted to emphasize that that is the spirit in which this company is created, and he desperately wants to try to hold onto that.
He has held off on listing this company for as long as he possibly could. The company is nearly eight years old. They’re nearly up to 500 investors, and that’s essentially a big part of what is triggering this listing.
In the US, once you hit 500 investors, you are forced to open your books to the regulators, so they’re going to have to open the books to the regulators shortly in any case, so they may as well list and get all the other benefits as well.
Bernadette: What are those benefits, Kevin? I’m trying to think, other than just having to have quarterly reporting and that kind of thing, if he really wants to stay true to this manifesto, as you say, then don’t list. Don’t be having to pander to shareholders.
Kevin: Well, increasingly, the benefits of listing are coming into question. More than ever, a lot of companies avoid listing and prefer private sales. Zuckerberg was offered many times from Google and other companies to buy it. He refused. One of the big reasons to list is to help some of their investors take money off the table. They’ve had over two billion dollars’ worth of investments in Facebook to date. Some of those investors would be pressuring him to cash in and take the money off the table.
It’s going to probably be valued between $70 and $100 billion. Some of those investors, interestingly, are people like Elevation Partners, which is a venture capital company based in the States with one of the investors as Bono from U2.
Another big invest…
Bernadette: It’s funny, because just as you said that, the song “Elevation” came into my head. I wasn’t expecting you to say “Bono,” though.
Kevin: I think that was one of the inspirations for the name of the company, was one of the themes from their song, “Elevation.” That’s definitely a big push, but as I said, once you hit 500 investors, which they’re nearly at, they have to open their books in any case. Having to help the investors take some of the money off the table, and it can also help you raise money. If they would require further capital, being listed can often help you raise money. Not always because, particularly in Facebook’s case, being in Silicon Valley with access to all the venture capital funds, but it can provide a mechanism for that.
Bernadette: Any idea what the shares will go for at the start of all this?
Kevin: In the private markets, Facebook’s valued at the moment at about $90 billion, so they’ll probably reverse engineer that back into a share price. Interestingly, at the moment, Facebook’s profits currently are more than what Google’s total revenue‑ revenue, not profit ‑ was when Google listed. The scale of the actual revenues that Facebook has are really significant. They’re running at a $3.7 billion a year revenue rate.
Bernadette: Wow. It’s so much money.
Kevin: Only a few years ago, they were $150 million in 2007. That’s why I started off by saying it’s really the velocity of this company. The most interesting for me is, in eight years, we have a company of this size, started by a youngster that didn’t even have a degree, with an initial seed fund of about half a million from one of the Silicon Valley veterans. [7:33] It really is quite significant, and I personally don’t think Facebook will be the first company of this size that we will actually see. We will see companies whose velocity will potentially even be faster.
Bernadette: Yeah. Kevin, I do have to ask you one more question. It’s a bit of a dumb question in some respects because I use Facebook. Lots of people use Facebook. I was checking out a friend’s photos yesterday, saying “Farewell to the workplace” and that kind of thing. We’re all jumping around on Facebook. I promote it all the time, “Facebook.com/abcgoldcoast. Find out what’s happening on our station.” I don’t pay any money. I’ve never exchanged money for Facebook. I’ve never clicked on one of their ads. How are they making all this money?
Kevin: It’s an excellent question. About 70 percent of their money at the moment is made from advertising. About 30 percent are made from payments. The ads, yes those little ads you see on the side, that people click on and Facebook charges the person who places the ad. The payments for games such as FarmVille and CityVille, if you sign up for credits and things like that, Facebook takes a cut of that. Even though you may not have clicked on the ads, with about 500 million users a day on Facebook, you only require a tiny percentage of those people to click on the ads.
That being said, in their documents, they do outline some of the potential risks, and one of the risks outlined is that people will not engage with the ads and that they won’t be able to sell enough ad inventory, etc. They’re still a company like everyone else, and they still face risks, and the future is still unknown.
Bernadette: All right. Kevin Garber, it’s really great to talk to you again. Thank you very much.
Kevin: Appreciate the time. Thank you.