Management consultant and business expert Peter Cohan does not plan on investing in Facebook stock any time soon. The author of 10 business books, including Capital Rising and Export Now, took a look at the social media network's filings for its coming share sale, which could value it as high as $100bn, and knew he would take a pass. "Everything is so hyped. They are tapping a bubble," he said. Nor does Cohan intend even to join Facebook. "I hope that I can outlast it," he said.
That sort of scepticism has not been the dominant tone of what must rank as one of the most remarkable weeks in the history of the internet. It saw Facebook complete its journey from its birth in a Harvard dorm room to going public, in a move that will create hundreds of new millionaires among its employees and turn its chief executive, Mark Zuckerberg, into one of the richest and most powerful people in the world – on paper, at least.
Documents filed with the US Securities and Exchange Commission (SEC) claimed that it had a staggering 845 million active monthly users, half of whom sign in every day, $3.7bn in annual revenue and a rocketing growth rate. It also has a very healthy profit margin of 27%, just above fellow internet giant Google. This is a company that seems to give the final lie to the image of tech firms as coming prematurely to market with more in the way of wild dreams than a solid balance sheet.
No wonder Facebook has achieved the almost impossible for a modern American corporation in being not only the subject of a Hollywood movie, but the subject of one that was exciting and critically acclaimed. Yet amid all the merited praise of Facebook's astonishing rise, it is possible to find sceptics about the future.
Facebook is entering a very different world from the one in which it grew up as a brash Silicon Valley startup. It will face different pressures now it has come of age. Even among those who reacted positively to Facebook's move last week it was possible to detect a change of mood. "It is a very valuable company. But there will be bumps on the road ahead," said David Sherman, professor of accounting at Northeastern University in Boston.
Facebook is unusual in that its biggest asset is not really something it makes. It is not a product in the traditional sense of the word and there is not a single service that it provides. Instead Facebook's true value lies with its vast user base and the myriad, ever-shifting ways in which its members use the website.
That mother lode of personal profiles is what advertisers prize above all. The information that Facebook harvests and stores on its users is a goldmine for marketers and any company serious about selling its products in the 21st century.
But one problem Facebook faces is how to expand that already enormous user base. What started out as a networking site for Harvard students now encompasses almost one in eight people on the planet. Thus the sort of massive exponential growth that has marked Facebook's astonishing rise is simply not going to be possible for much longer.
Coupled with that are problems in areas of the world where Facebook has yet to make its mark, notably parts of Asia where local social media websites have a strong market share, and most particularly China. In its filing to the SEC last week, Facebook mentioned China no fewer than nine times. It is not hard to see why. There are more than half a billion Chinese online, representing a tempting last hunting ground.
China's government is less keen on being infiltrated by a western social media giant. Beijing is notorious for its desire to control the information to which its citizens have access. Facebook has been blocked there for the last three years and, though Facebook's internal culture is less politically opposed to censorship than other internet firms, like Google, it might not be possible to negotiate a way in. The company admitted as much: "We do not know if we will be able to find an approach to manage content and information that will be acceptable to us and to the Chinese government," it said last week.
But Facebook has to find growth somewhere. Now that it plans to go public, it will gain shareholders who will demand nothing less than ever-rising profits each three months. So if broadening its user base might not be easy, another tack would be to deepen it. It could improve the value of its user base by extracting more intimate information from users that is valuable to advertisers, who could deploy it in ever more targeted and sophisticated ways.
Part of that value is Facebook's existence as a place for networks of friends. Advertisers are discovering that people are far more likely to pay attention to ads for products that their friends like, or have been recommended to them by friends, rather than by just clicking on a seemingly random internet advert that appears on their screen. Catherine Tucker, a professor at the Massachusetts Institute of Technology's Sloan school of management, has published a recent paper on such "social advertising" and believes Facebook could unlock huge value with it. "Facebook knows who people's friends are, which can be hugely valuable to marketers. Feeding that social network into the Facebook algorithm creates huge and under-exploited profit potential," Tucker said.
But it may not be that easy. Firstly, the advertising cannot be intrusive. Many experts – as well as ordinary users of Facebook – believe that the more obvious the advertising on the website, the more people will be put off from using Facebook. There is another concern too. It is a common complaint of many Facebook users that the company is too keen to override their worries about privacy.
They resent the idea that Facebook is not simply a useful service that helps them stay in touch with people, but is in fact a gigantic, profit-making company that sees them as a valuable resource to sell to advertisers. Collecting too much data on users and allowing advertisers access to it too obviously could cause them to seek an alternative service. It is a delicate tightrope to walk.
The man most responsible for walking that fine line is Zuckerberg, who who has steered the firm this far. But now that it is coming to the market, Zuckerberg's role is set to come under increasing scrutiny. The needs of a startup – even a huge one – are very different from those of a fully grown corporate behemoth with a floating stock price and outside investors clamouring for returns at all costs.
Some see Zuckerberg as less well equipped to tackle those demands as chief executive than current chief operating officer, Sheryl Sandberg, who has a strong business background and is the company's highest-paid employee. They see Zuckerberg as more of a visionary and a creative force, while Sandberg as the real business brain.
Not that Zuckerberg seems to be stepping away from the frontline of Facebook's development any time soon. He owns about a quarter of the company and agreements with other shareholders mean he holds about 60% of the shares that carry voting powers: effectively, a controlling stake. That is far more than Bill Gates had when Microsoft went public and also more than Google's co-founders had when that firm followed suit. Even in its SEC papers, Zuckerberg showed his individualistic streak by telling potential investors he might make decisions that put Facebook users ahead of Facebook shareholders.
In a letter to investors describing the company's mission, Zuckerberg praised "hacker culture" and said the firm was more interested in its social mission than just making money. "Simply put: we don't build services to make money; we make money to build better services. And we think this is a good way to build something. These days I think more and more people want to use services from companies that believe in something beyond simply maximising profits," Zuckerberg wrote. Some experts welcomed that view. "In the long term that could be a good thing," said Sherman.
Yet Zuckerberg's sentiment will be news to most Wall Street investors, as Facebook is likely to discover soon after its first shares hit the open market. If profits or sales disappoint at any stage, then Facebook's shares will plummet just like those of any other company. "Wall Street will beat your stock down if you don't beat your profits every quarter," said Cohan.
Then there is Google+, the rival social networking website set up by Google. Other potential "Facebook killers" will almost certainly emerge from some starry-eyed student's laptop, just as Facebook itself once did. Another possible problem is the explosive growth of social networks on mobile phones, which currently do not carry much effective advertising and thus blow a hole in Facebook's existing business model.
The brutal fact is that Facebook's future is unknowable. For every pundit wowed by its possible applications and the supposedly infinite numbers of future services, there is another seeing little scope for growth. For every admirer of Zuckerberg who believes in his genius, there is another who thinks pride becomes before a fall. For every investor agog at the prospect of buying a chunk of Facebook's bright future, there is another calling the whole thing a gigantic bubble.
