Had to cross post this discussion with my brother Michael Whalen from The Institutional Risk Analyst. The past articles in The IRA require a $99/yr subscription, but the most recent is free.
Also note link to comment by Barry Ritholtz on The Big Picture re: the Facebook IPO. Actually Goldman Sachs led the covert IPO and hype festival last year, but the folks at the SEC and FINRA were sound asleep.
Facebook "Jumps the Shark" Interview with Michael Whalen
The Institutional Risk Analyst
February 6, 2012
"Facebook (FB) claims 500 million subscribers. How many of these are
active users -- at least once or twice per week? How many of these are
dead accounts, with no activity for 30 days? 90 days or more?"
The Big Picture
Questions for Facebook IPO Investors
In this issue of The Institutional Risk Analyst, we talk again with
entertainment & media analyst, consultant and professor Michael
Whalen about the impending IPO of Facebook. We last spoke to Michael in
November, "A Tale of Two Economies, Michael Whalen on the Future of
Media." Many of his observations and predictions have so far proven
The IRA: Michael, the long-awaited Facebook IPO document has been
released. The NY Times has even decided that Mark Zuckerberg is some
sort of visionary who likes to take chances and risk in his business.
Yet the IPO terms make Zuckerberg look more like Henry Ford, a defensive
paranoid man who needed two classes of stock to protect the Ford family
from their fellow investors. What is your take on Facebook and
MJW: I think the "dot com boom 2.0" has begun. There seems to be so much
emotional and reactionary money on the street - especially around this
deal. Does no one have a memory of 10 years ago? Valuations based on
nothing? Millions spent on vaporware? I think your allusion to Henry
Ford is an apt one. Zuckerberg's paranoia is now becoming legendary in
Silicon Valley. He wouldn't be the first founder to feel this way - but
given the amount of media attention - it's troubling. Frankly, Facebook
is not your typical dot.com but I believe it is heading for the same
fate as many of the tech bubble dinosaurs of 10 years ago.
The IRA: How so?
MJW: The media seems to believe that the valuation of the company is
based on the "personal data" of the 800 million + subscribers of
Facebook. I disagree - - the valuation of the company MUST be based on
their ability to actually MAKE MONEY inside of the paradigm and the
environment they invented. So far, I am not impressed.
The IRA: Why not? Don't you believe that Facebook will change everything? Elsewhere on the web,
"Banking 2012: Maneuvering to Survive the Desert Landscape of Zero
Interest Rates" by IRA CEO Dennis Santiago published on the Huffington
MJW: They "eeked" out less than $4 billion in cash in 10 years with the
help of 800 million pairs of eyeballs. That is pathetic by any new media
benchmark. Also the Facebook price to earnings ratio, if they really
think they will raise 100 billion dollars, will be 100 to 1. Facebook
has only started a conversation around social media, a conversation that
is evolving daily, hourly. The latest reports is that "boutique"
communities are far more popular than the broad appeal of "friending"
one fifth of the planet.
The IRA: So you are not impressed by news reports saying that Facebook
is going to start embeding ads all over their real estate?
MJW: No, I am not impressed - the whole thing with the infatuation with
them is ridiculous. As I said, this is more of the same over-hyped dot
com crap that people are still licking their wounds over from a decade
ago. Is Facebook popular because it is mostly "free" and free of the
advertising clutter of so many other sights? Yes. As a public company,
they will not be able to keep the focus on the "user experience" by
monetizing as many parts of Facebook as possible. Frankly, it is the
same tired company arc we've seen played out - but because of the size
and the media attention - somehow, we think that the rules don't apply
to them. Companies are companies and people are people.
The IRA: Let's talk governance at Facebook then revert to the business
model. The odd thing about the media buzz around Facebook and Zuckerberg
last week was how The New York Times presented him as a "loner".
Founders have a poor track record of transition from vision to
operational reality. Ford had to have James Couzens to turn Ford Motor
from an idea into an enterprise. Even Steve Jobs had his operators and
finance gurus to execute the vision for Apple. Zuckerberg walling
himself inside Facebook with no accountability to the board of a
superficially public company does not make us feel warm and fuzzy. Are
we too harsh?
MJW: Let's be clear: the Facebook phenomena has been great - so far. I
use it and so do my kids. However, does it deserve to be mentioned in
the same breath with Apple or even Google? I am not sure. I think for
investors looking seriously in the media and technology space the
prudent play is to wait and see. I have said many times that Zuckerberg
is looking to use Facebook as a"wrapper" for other media and other
The IRA: So how does the IPO help Zuckeberg, other than making him and other insiders rich?
MJW: It appears that Mr. Zuckerberg wants to build a war chest to either
buy access to content (did someone say Spotify, ahem, Facebook Music?).
Or be ready to finally kill Netflix and the video streaming chaos
that's currently out there? We'll have to see... But I think The New
York Times is right in printing that the ultimate goal of this IPO is to
keep Zuckerberg safely in control and big enough to stave off the
people who might buy them.
The IRA: Precisely. Without the media hype and Russian oil money, would
Facebook even be independent today? Facebook reminds us a lot of on-line
banking, a neat feature with great customer relevance but hardly a
business line that generates stable revenue. Online features like
Facebook look more like a marketing expense than a revenue line. But
since Zuckerberg will not be accountable to his new shareholders, who
MJW: Your question about accountability and oversight is crucial - at
Facebook Zuckerberg has almost no checks and balances on his decisions.
How do you think the king of social media will take board meetings and
answering questions on the Sunday talk shows? Answer: not well.
Zuckerberg is not known as a manager and apprently he isn't really the
"vision guy" at Facebook either.
The IRA: But didn't Zuckerberg study the vision thing under Steve Jobs
until the former Apple chief disappeared into the ether a la Yoda in
MJW: I am not sure what Zuckerberg learned from his relationship with
Steve Jobs - but so far as putting forth your customer's experience
first along with VALUE certainly seems to be NOT one of them. Jobs was a
master of listening to and executing what his customers wanted BEFORE
they knew they wanted it. This is why the issue of earnings at Facebook
is crucial. Most Facebook users use the service because their
"experience" is free. Will they pay for it? Will they tolerate more ads
and targeted messages? I doubt it.
The IRA: So like Twitter, the path from traffic to revenue is uncertain?
The point about Apple is key. Jobs sold the world on the freedom of the
Mac environment with one of the most tightly-run businesses in the
world. The world of Apple is a closed, deterministic world, yet creative
artists like you see Apple as an image of freedom. Makes us laugh to
recall the old Apple TV ads using the imagery of smashing Orwell's 1984,
sorta focused on Microsoft. But the value, the relevance of Apple is
obvious. Not so with Facebook.
MJW: Yes. I would say look for Facebook to depopulate severely in the
next 12 - 18 months. Right now is their "highpoint" in terms of total
registered users - now it's all trying to cash-in on the eyeballs that
haven't found other ways to express themselves on-line.
The IRA: That is a fairly bold statement, to paraphrase Samuel L.
Jackson in Pulp Fiction. Are you saying that the fact of the IPO is
going to force the immediate monetization of Facebook with ads, even pay
for enhanced functionality? Is there any evidence in the channel to
back that up? Are you saying that we are looking at peak revenue now?
MJW: I am saying that in this paradigm - using Facebook's puffed-up user
numbers - yes, this is the MOST revenue they can be generating. Their
customers are getting more and more sophisticated at AVOIDING the paid
messages, posts and ads of Facebook's sponsors. Zuckerberg and Company
must figure out a way to inextricably fuse PAID content with the
The IRA: Google and others have made this transition. You are not optimistic about Facebook?
MJW: They have miserably failed up until this point - - anyone remember
"Facebook Video"? And yes, I am saying that with the public pressure,
stockholders and the constant media glare will be ON to monetize as many
parts of Facebook as possible. College kids are already leaving in
droves - next will be the casual users who don't want to be "bothered"
with the fees and subscriptions that will be coming followed by the
"hard core" who see the wave of fees as a betrayal to the culture of
The IRA: So unlike The New York Times and Michael Bloomberg's magic
kingdom over at Bloomberg News, you think that Facebook will be forced
to "show us the money" even with Zuckerberg baracaded inside his office
with two classes of voting shares?
MJW: Yes. I predict this rationalization of Facebook will happen
quickly. Facebook will try to offer "levels" like "basic" and "full
featured" - but like MySpace and a dozen smaller social networking sites
- this IPO is the moment that Zuckerberg's creation "jumps the shark"
in the minds of his loyal core of users and very soon with his new
investors. I hope he has a trick up his sleeve with all those billions -
but history has shown us that arrogance usually gets the best of any
founder when they stay too long in the spotlight. Maybe the big "next
move" for Zuckerberg will be to step aside and let someone more skilled
with all the levers and dials as a real CEO do the work.
The IRA: Thanks Mike. It will be fun to watch.
Questions? Comments? firstname.lastname@example.org
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