Facebook’s IPO - it’s up to you

 

The BBC's Rory Cellan-Jones on what the stock market float means for Facebook and its users

"If you're not paying, you're not the customer, you're the product." This warning to Facebook's 800 million users about the nature of the social network's business model has become something of a cliche. But, as the world awaits the most hotly anticipated IPO since Google, it's clear that what will be on sale is you, the user, and your 800 million friends. (With half of the UK population on Facebook, I'm assuming that you're likely to be a member.)

How much we are deemed to be worth is what will determine the value of the business when the shares are priced. Facebook, like Google, is an advertising business and one that has introduced a radical new way of reaching consumers. With Google it was via our searches, with Facebook it's our likes, dislikes and all the other data that we contribute freely to the site.

Ask anyone about adverts on Facebook and they are likely to tell you that they never notice them, and are sure they have no impact on their purchasing decisions. They are quite likely to say the same about the ads served up by Google, yet the search firm's clients are happily handing over billions of dollars, confident that this is the way to reach their customers

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On a visit to a London digital marketing agency yesterday, I got a glimpse of how powerful a platform Facebook can be for advertisers. I-Spy demonstrated how they could funnel into Facebook's data to target a precise group of people - say, 25-40-year-olds in the Reading area, looking for jobs in the technology sector.

The agency, which used to send nearly all of its clients' marketing budgets in Google's direction, is now putting about 10% on Facebook, and expects that to grow. Jim Brigden, I-Spy's CEO, was enthusiastic about what the social network could offer in terms of targeting, but cautious about whether it would ever be as useful as Google.

He explained that Google delivered customers who were already looking for something, while Facebook might be better for engaging with consumers and letting them know about a brand. "It won't work for everything," he said. "You wouldn't try to sell funerals or financial services." But his clients, from a recruitment agency to the makers of Spam (the real thing, not that stuff in your inbox) were very happy with the results so far.

What we will find out when the IPO papers are filed is just how much revenue this kind of advertising is earning for Facebook, and how rapidly that is growing. Then Wall Street will have to decide how to price the shares. Last week they were trading privately at a valuation of $80bn, and there is talk of the price tag climbing to $100bn or above.

That figure looks ridiculous for a business with much to prove, but optimists will say that there was similar scepticism about Google's IPO in 2004. The search firm went on to show that it was worth a whole lot more than the value at which it floated.

Whatever the price, the Facebook IPO will generate eye-watering sums for investment banks, lawyers, and of course Mark Zuckerberg and other owners of a slice of the business. Then the really difficult bit starts - showing that the Facebook audience really is a valuable resource, willing to be targeted with more and more advertising. In other words, it is up to you and your Facebook friends.

 
Rory Cellan-Jones Article written by Rory Cellan-Jones Rory Cellan-Jones Technology correspondent

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  • rate this
    +19

    Comment number 8.

    Some stupid comments in here. You don't 'do' anything with TV ads either but companies still pay big money to put them in front of you. Will be interesting to see their figures before commenting on the valuation.

  • rate this
    +14

    Comment number 11.

    The ads on facebook work on the same sort of principle as TV ads - nobody specifically watches them but I bet 95% of the population will have heard of Go Compare, Wonga, Compare the Market etc. You don't have to click on them, pay for any apps or generally contribute (cashwise) for this type of marketing to be effective - quite the contrary, the less you notice the more subliminal the message.

  • rate this
    +11

    Comment number 21.

    "13.Untio

    If facebook starts to relentlessly advertise to me I will stop using it and I'm sure there will be millions more than follow me in that."
    ---
    1st - it's not FB that advertises to you, it's the companies who use FB.

    2nd - they already do it. Or have you not noticed the constant "find us on FB" messages on TV and websites?

    I am stunned at how dumb some of the userbase of FB are!!

  • rate this
    +10

    Comment number 1.

    I heard the share price will be $1 for every "I don't use Facebook anyway" comment below....

  • rate this
    +9

    Comment number 2.

    A valuation of one hundred billion dollars is presumably based on the assumption that Facebook won't be overtaken by the Next Big Thing in the next five years or so.

    I don't know what the Next Big Thing might be, or even if there will be one, but neither did the people who invested vast sums in MySpace, Bebo and Friends Reunited.

    So I'm out. :-)

 

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