Facebook's potential 'unlimited'


Tens of millions of users are signed up to the social networking site, Facebook. Goldman Sachs invested $450m (£285m) in the company at the start of this year giving it an implied value of $50bn. That's just under $100 for each Facebook member. Not bad for founder Mark Zuckerberg who created the site just six years ago. So what next for the company? Does this new investment make it more or less likely that the company will go public?

David Kirkpatrick has written 'The Facebook Effect', a book about the company; he spoke to BBC Business Daily's Justin Rowlatt:

David Kirkpatrick: I think anyone who wants to pin an exact value on it, is somewhat guessing, but I don't think it's insane to say that it could be worth 50bn or even by the time even a year or two rolls around 100bn, the company's earning potential is almost unlimited. And the reason why it has not shown such huge revenue and profit numbers up to now, is primarily just because Zuckerburg has always taken an attitude that he wanted to delay, what is called monetization, until the farthest possible moment, putting an emphasis instead on user growth.

One thing about Facebook that a lot of people don't realise is that Facebook has two distinct types of advertising already, that they're already selling in large quantity, and they have a whole bunch of commerce businesses that are being built around their so called credits product, and where this is evident so far is in the gaming business. But they're going to make hundreds of millions of dollars this year, just by creating their credits which is used to buy virtual goods in games on Facebook. So that's a completely different business than the ad businesses. Basically Facebook has a way to make money whenever you spend money in context of your friends, and if you think of where that could go down the road, there's infinite levers that Facebook could turn if Facebook wanted to become a tawdry, meretricious Time Square-like ad-centred thing like MySpace used to be, they could easily do that, and they could ramp up the advertising revenues hugely. But what Zuckerburg fears, and he's probably right, is that it would turn off the users.

Justin Rowlatt: Is this also why he seems so reluctant to take the company public?

DK: Yeah I think he's so reluctant, I actually don't think it's going to happen. One of the odd and amazing, weird things about Facebook is that it is completely and totally controlled by one person. He doesn't want to give that up and he doesn't have to give it up. We all know Wall Street is a short term thinking place that does not understand the value of building businesses over many years and decades which is the way he thinks about it, Wall Street could never, and will never, think in decades and Zuckerburg knows that.

JR: But he is happy to bring in these new shareholders, isn't he? All this money from Russia that he's brought in through Goldman Sachs.

DK: The complication is that he does need money. He's now competing with Google. He knows Google is gunning for him and he's got to have resources to buy other companies, to compete with them in acquisitions, and to hire additional programmers to keep developing better and better products. And he can't slow that down because he's competing now, at the state of the art against the absolute best people. And if Microsoft wasn't a partner of his he'd be competing against them, and they're still the ultimate richest technology company.

JR: So how much money is Facebook actually making at the moment?

DK: It does appear they had at least 2bn in revenue last year. And according to some ways of slicing and dicing the number, four to six hundred million of that was profit, I think at the moment, the way they are actually operating their re-investing almost everything they make. They're building two humongous data centres in North Carolina and Oregon. You know there's all kinds of expenses to this business.

JR: I'm still confused about this shareholding thing and I know that you say you don't know how many shares are being held off the top of your head, but are these Facebook shares actually being traded?

DK: Traded all the time. And that's a problem.

JR: But how does that work in a non-public company?

DK: There's a number of facilities that have emerged, you know just in the last couple years markets are being created by small companies, notably Sharespost and Secondmarket, which are two new internet startups themselves that have made a business out of creating a liquid market in company shares.

You can buy and sell Facebook shares. Generally in order to do that you have to prove you are a sophisticated investor and you have a lot of money to lose, because the risk is considered very high, at least in the United States, the federal regulations for trading in that kind of stock require that you be someone who has a lot of money and recognizes the risks.

JR: I mean aren't the regulations that if you have any more than 499 shareholders you have to go public?

DK: Well, 499 is the threshold of shareholders but once you pass that you do not have to go public, you simply have to start publishing your financial data as if you were public. And what is almost always the case in the past, is that companies that reach that threshold, figured if I'm going to start going through all the inconveniences of publishing my data I might as well just issue public shares and have an IPO. My belief is, knowing Zuckerberg, that he will probably delay an IPO. Mark doesn't really want to have that imposition of Wall Street's oversight, and what he can do if he does it that way, is he can have the equivalent of a public company, in that the data is public, but he won't have rapidly traded shares of short-sided Wall Street people, because he can actually insist that most of the shares are covered by covenants that restricts how frequently they be traded.

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