A trove of stories from the Facebook IPO
1. Facebook, third parties and data security:
Embedded in the typically long recitation of ārisk factorsā designed to shield IPO issuers from shareholder suits should things go wrong is a section of the prospectus that warns:
Our efforts to protect the information that our users have chosen to share using Facebook may be unsuccessful due to the actions of third parties … If these third parties or Platform developers fail to adopt or adhere to adequate data security practices or fail to comply with our terms and policies, or in the event of a breach of their networks, our usersā data may be improperly accessed or disclosed. Any incidents involving unauthorized access to or improper use of the information of our users could damage our reputation and our brand and diminish our competitive position. In addition, the affected users or government authorities could initiate legal or regulatory action against us in connection with such incidents, which could cause us to incur significant expense and liability or result in orders or consent decrees forcing us to modify our business practicesā¦.
Not explained here is what protective mechanisms Facebook has to prevent these kinds of third-party security breaches and other abuses. Is the privacy and data protection of Facebook users only as strong as the weakest link among these third parties? Is there an Internet equivalent of the Gulf oil spill out there waiting to happen, after which Facebook points fingers at these third parties?
2. Facebook and the ad business:
The prospectus summarizes Facebookās revenue machine this way: āWe offer advertising solutions that are designed to be more engaging and relevant for users in order to help advertisers better achieve their goals.ā Or, as the New York Times put it: āEvery time a person shares a link, listens to a song, clicks on one of Facebookās ubiquitous ālikeā buttons, or changes a relationship status to āengaged,ā a morsel of data is added to Facebookās vast library. It is a siren to advertisers hoping to leverage that information to match their ads with the right audience … They reveal to the company not only their names (Facebook prohibits pseudonyms) and hometowns, but also their friends and family members and their tastes on everything from pop music to politics ā¦ Facebook offers advertisers a giant basket of information so they can find precisely the audience they covet: a Boston woman who posts that she is āengagedā may be offered an ad for a wedding photographer on her Facebook page ā¦ Similarly, every press of a ālikeā button on Facebook signals a consumerās preferences and shapes the ads that are shown.ā
That was a good overview. But Iāve been waiting for a story that goes much further and lays out, with real numbers, how services like Facebook and Google — whose search advertising immediately targets people whose searches indicate they are interested in what the advertiser is selling — have changed the economics of advertising and threaten to crush competitors in more traditional media.
Hereās how to do that story: Assume you have two big advertisers — say
Ford Chevy Volt cars and Delta Air Lines. Then take five different kinds of media: NBC broadcast television, the New York Times, Time, Facebook and Google. Then take the exact cost in advertising dollars it will take to reach a thousand potential buyers of Ford Chevy Volts and Delta plane rides in each of those media. But then add another, all-important factor: how targeted will those ad purchases be — meaning that if a thousand people see an ad on an NBC show, how likely are they to be people actually interested in buying a car anytime soon, or flying somewhere that Delta flies? What youāll be able to measure (and add color to by interviewing Chevy Fordās and Deltaās ad buyers) is the cost per thousand likely buyers of the product — not just potential buyers, likely or not. The exercise, I expect, will leave the old media in the dust when it comes to cost per likely buyers. Theyāll only be able to defend their ad products by arguing ā- perhaps accurately, but with no data to prove it ā- that being on the back cover of Time strengthens brand awareness and image.
Next, do the same exercise comparing the cost per thousand likely customers for a car dealer or restaurant to advertise in the local newspaper or on the local television station in Columbus, Ohio, versus using Facebook or Google to reach the same people. My guess, by the way, is that Googleās search ads will still be the best buy in terms of cost per thousand likely customers because search ads reach people at exactly the moment theyāre searching for the product being sold.
Then, thereās the flip side of the story: How does Facebookās economic model for this kind of targeted marketing actually affect the privacy of us targets? There has been lots reported about this, but Iām still waiting for a story — in plain English — that explains exactly what the vulnerabilities are. What exactly can Facebook do or not do with our personal information? Can it sell or provide our email addresses or even our names to its marketing clients? Can Facebook send targeted emails or messages to us on behalf of clients, which might be just as annoying or compromising? Or can Facebook only put the clientsā ads on Facebook pages that we view? I know they say they wonāt ever sell anything that actually identifies individuals by name, but what are all the ways they monetize personal information? And are our names available if the information is subpoenaed — or hacked, or abused by those āthird partiesā described above? What about Google?
While weāre at it, a story like this should add some perspective by comparing what Facebook or Google do with names and personal information to how credit card companies monetize personal data having to do with their account holdersā buying habits. Isnāt American Express, for example, as much in the data business as Facebook?
3. Facebook and the threat of mobile:
One of the most interesting sections of the prospectus is this entry in the section under ārisk factorsā:
Growth in use of Facebook through our mobile products, where we do not currently display ads, as a substitute for use on personalĀ computers may negatively affect our revenue and financial results ā¦ We anticipate that the rate of growth in mobile users will continue to exceed the growth rate of our overall MAUs [monthly average users] for the foreseeable future ā¦ Although the substantial majority of our mobile users also access and engage with Facebook on personal computers where we display advertising, our users could decide to increasingly access our products primarily through mobile devices. We do not currently directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven. Accordingly, if users continue to increasingly access Facebook mobile products as a substitute for access through personal computers, and if we are unable to successfully implement monetization strategies for our mobile users, our revenue and financial results may be negatively affectedā¦
There is no guarantee that popular mobile devices will continue to feature Facebook, or that mobile device users will continue to use Facebook rather than competing products. We are dependent on the interoperability of Facebook with popular mobile operating systems that we do not control, such as Android and iOS, and any changes in such systems that degrade our productsā functionality or give preferential treatment to competitive products could adversely affect Facebook usage on mobile devices. Additionally, in order to deliver high quality mobile products, it is important that our products work well with a range of mobile technologies, systems, networks, and standards that we do not control. We may not be successful in developing relationships with key participants in the mobile industry or in developing products that operate effectively with these technologies, systems, networks, or standardsā¦
In other words, people are increasingly going to Facebook through their mobile devices, which reflects a general shift toward accessing content through smartphones and tablets. The problem is that advertising on those devices is harder to sell because it is harder to display. Equally important, itās harder to integrate if you donāt control the mobile devicesā operating systems. And the operating systems that control the most important of those devices ā- Android and iOs -ā are controlled by Facebookās key rivals: Google and Apple. The New York Times has a good story this morning on the general challenge of selling advertising on mobile devices that keys off of this Facebook disclosure in its IPO, but it seems thereās a good story out there for whoever can scope out if and how Google and Apple could and might take advantage of Facebookās vulnerability.
4. Facebook and litigation:
Another part of the ārisksā section says:
We are involved in numerous class action lawsuits and other litigation matters that are expensive and time consuming, and, if resolvedĀ adversely, could harm our business, financial condition, or results of operations. In addition to intellectual property claims, [these suits include] numerous other lawsuits, including putative class action lawsuits brought by users and advertisers, many of which claim statutory damages, and we anticipate that we will continue to be a target for numerous lawsuits in the future.
The prospectus goes on to say that the company doesnāt believe that any of these suits will result in material losses, and itās true that any large, successful company is the target of all kinds of attacks from plaintiffsā lawyers. Still, someone ought to do a story homing in on the cases that are potentially most threatening, telling us what theyāre about and what the consequences, if any, might be. Are they real, or do they simply illustrate abuses of the plaintiffsā bar?
1. Last weekās column suggested a story investigating how many and what kind of Newt Gingrichās expenses were paid for through Gingrich Holdings, which is set up as an āS corporation.ā The Feb. 4 edition of the New York Times carried a story examining the risks and advantages of Gingrichās S corporation strategy.
2. The Dec. 6 column had an item about how the New York Times had scored a scoop in video with its interview with former Penn State coach Jerry Sandusky and suggested a story about how print media were expanding their 24/7 online offering to include breaking news videos that will compete with the television news networksā online offerings. This morning the Times did just that story, focusing on Politico and the Wall Street Journal, but also mentioning the Times.
PHOTO: An illustration picture shows the log-on screen for the website Facebook, in Munich, February 2, 2012. REUTERS/Michael Dalder