IN The Social Network, the Oscar-winning film about the rise of Facebook, Sean Parker, the company’s founding president, tells another investor: "A million dollars isn’t cool – you know what’s cool?" The scene cuts to Parker in a different meeting. "A billion dollars," he says.
By 2006, two years after those scenes were set, prospective buyers were reported to be offering $2 billion to buy Facebook. Mark Zuckerberg, the company’s founder, said no. Tomorrow, Facebook will float, an event that is expected to value the business at around $100 billion. It seems that even Hollywood wasn’t thinking big enough when it comes to this behemoth of the web.
Even those who haven’t seen the film are probably familiar with the story. Mark Zuckerberg, who was 28 on Monday, started Facebook in 2004 while he was a student at Harvard. The site quickly expanded to other universities and, from there, it wouldn’t be much of an exaggeration to say that it conquered the world.
Facebook now has more than 900 million users, who share 46 billion pieces of “digital content” every day. That content might be short updates, photos, links to other websites, or invitations to events. Many of Facebook’s members use it instead of email. Others play a variety of games. Then there are those who follow pages run by celebrities, sports teams and even brands.
Almost half of the population of Ireland and Britain is on Facebook, and more than half of the US population. In the past six months, membership in Japan, South Korea, Brazil and India has increased hugely. If you exclude China, where Facebook is blocked by the government, 70 per cent of the world’s internet users are part of its social network. And Zuckerberg plans to start targeting China next.
“It has incredible mass and reach,” says Ben Wood, managing director of digital marketing agency iProspect. “It’s the first platform that has brought together word of mouth and social marketing with big brands.”
Given the scale of the site, it’s no surprise that Friday’s IPO (initial public offering) will be the biggest technology float in history. But while Facebook employs a lot of computer engineers, manages servers and builds web tools, it might make more sense to think of it as a marketing firm.
All of the data those hundreds of millions of users add to Facebook contribute to building a profile of their interests. Using Facebook’s tools, advertisers can target very specific sections of the membership. If you want to reach women aged 18 to 24 who live in London and are fans of Lady Gaga, then Facebook can sell you an advert that will be shown only to members who match that profile.
But Facebook can go further than that, thanks to its “social graph” – a virtual map of who is connected to whom, which is a powerful lure for advertisers. When a user clicks on a brand page to say they “like” it, they could find themselves in a “sponsored story” – an advert, in other words, for that brand. So if I “like” the Rolex page and Rolex has paid Facebook for sponsored stories, then my friends might see “Shane Richmond likes Rolex” in the sidebar of their page. That might encourage them to “like” the sponsored story, which spreads the message to their friends, and so on.
It’s that potential reach that has given Facebook its huge valuation. But the potential isn’t necessarily being realised. A new report, published yesterday, found that 57 per cent of Facebook’s users say they never click on commercial content on the site, and a further 26 per cent say that they do only rarely. Just 4 per cent said that they often click on adverts, which is only marginally better than the 2-3 per cent benchmark of success for traditional web advertising.
Earlier this week, car manufacturer GM said that it would stop paying for Facebook advertising. GM, the third-largest advertiser in the US, said that its marketing team was not convinced of the value of the ads. The company will maintain its Facebook page – which brands can create free of charge – but the announcement caused more than a few ripples of concern, with the IPO imminent.
“In the context of Facebook’s evolution, it’s still a pretty new business,” says Mr Wood. “It is too much to expect brands and Facebook to have totally resolved what the business model is.”
Another challenge that Facebook has identified is the growth of users accessing the site via mobiles. The company admits that it has not developed its mobile advertising strategy and if that doesn’t improve then “our financial performance and ability to grow revenue would be negatively affected”.
The flotation is expected to give Facebook a war chest of around $8 billion. A significant amount of that will be ploughed into mobile usage, says Ian Maude, an analyst with Enders. He adds: “Any substitution of mobile for PC [by users] is actually costing Facebook money.” Facebook has already moved to address that weakness by buying Instagram, a smartphone-based photography network, for $1 billion.
With a hefty valuation to justify, the pressure to make more money from users is likely to intensify. That could mean encouragement to share even more information. Fortunately, though Facebook has sometimes been criticised for a cavalier attitude to privacy, its users seem happy to keep on sharing. “The sheer amount of time that people spend on Facebook does lock them in,” says Mr Enders.
That might sound sinister, but it bodes well for the future of the company. The great spectre hanging over social networks is MySpace which, after being bought by Rupert Murdoch’s News Corp for $580 million in 2005, plummeted into irrelevance.
That could happen to Facebook, but if it does, the threat is likely to come from a more niche interest network, such as the picture-sharing site Pinterest. “At the mass end of the market, there really isn’t much out there,” says Ben Wood. Ian Maude agrees: “In the short to medium term, I don’t think Facebook is at risk.”
Of course, investors eager to buy shares with an opening price of up to $38 each may reach a different conclusion in the months to come.