The biggest story of the week is undoubtedly Facebook's (FB) enormous IPO. The company that Zuckerberg started in a Harvard dorm room and changed the way people interact and communicate will finally become publicly traded. Facebook has developed a long way from its days at Harvard, but despite this, the company still has much to prove before it should be considered a long term buy. Over the years, Facebook has accumulated approximately 800 million users. This number is incredible, almost one billion users, and many people must be thinking that it must be impossible not to invest in a company that attracts such a multitude of people. Well, the reasons are numerous, and much of Facebook's future success is entirely based upon these users. The fickle users pose somewhat of an ultimatum for Facebook; listen and tend to the users who helped make the company what it is today, or take advice from investors who are solely interested in a profit.
The legendary Mark Zuckerberg had the incredible vision to create and build Facebook, but will that translate into successful leadership in the future? The answer has yet to be found. While he did manage to lead the company to its current position, he also managed to wear a hoodie to a recent investor meeting on Wall Street. One couldn't ask for a more clear-cut sign of immaturity; the self-made billionaire at the head of what will be a multibillion dollar public company could not muster up the practicality of merely wearing a suit to an important business meaning. Another potential issue that this exposed is Zuckerberg's arrogance. It almost feels as if it was a snub to investors, a taunt in which the CEO conveys an attitude of assurance that the investors need Facebook more than Facebook needs them. Even if this were true, it is certainly the wrong attitude to have and when management has this type of attitude it is not uncommon that it spread throughout the company. Sure, this meeting may be overblown and maybe Zuckerberg isn't as immature or arrogant as wearing a hoodie made him out to be, but regardless this is definitely the wrong message to send to Wall Street. Another concern with Zuckerberg is his loyalty, or a lack thereof. Made very public by The Social Network, Zuckerberg essentially ousted his former close friend and CFO Eduardo Savarin. Yes this may be a movie, but it is known that Savarin did have his shares diluted and did end up filing a lawsuit and settled out of court which concretely shows a lack of loyalty on the part of Zuckerberg. So now back to the original question, users or investors, where will Zuckerberg's loyalty lie? Will he ditch the users and venture down the corporate path of maximizing profit, or will he continue to maintain a user friendly website? Nobody can know, but this poses another significant problem to Zuckerberg's ability to lead an investor and user friendly website/company. Maybe I am reading too far into Zuckerberg and his actions, but the issues that I have mentioned could potentially continue to plague Zuckerberg, and as management sets the tone for the rest of the company, they could end up plaguing Facebook as a whole.
Another problem facing Facebook, as it has faced other companies such as Google (GOOG), is privacy. Privacy on Facebook has become increasingly concerning even as Facebook has stepped up efforts to create customizable privacy settings. As the Consumer Reports Staff points out in an article on Yahoo! (YHOO), "almost 13 million users said they had never set, or didn't know about, Facebook's privacy tools. And 28 percent [of users] shared all, or almost all, of their wall posts with an audience wider than just their friends". This is alarming because personal posts intended to be private are often visible to larger quantities of people than users would like to share information with. To make matters worse, even if one protects themselves with privacy settings on Facebook, certain applications can potentially access this information regardless through friends. As a result, it is difficult to maintain a consistent knowledge about who is actually seeing your posts, posing a significant problem for Facebook users. The question is, how does this affect Facebook and its stock, and if the problem continues to get worse, the answer will be negatively. Eleven percent of user households are experiencing some type of privacy problem with Facebook, which is up 30% from last year, as Consumer Reports Staff points out yet again. The magnitude of the problem appears to be increasing substantially, and it is entirely possible that U.S. lawmakers follow the footsteps of European legislators in establishing stricter privacy laws. If not, it would not be surprising to see lawsuits stemming from privacy issues on Facebook sprouting up throughout the nation, and it could lead the largest right to privacy dilemma since Roe v. Wade decision that the right to privacy extended to abortion. While it is the marketing advantage of Facebook to know more about their users in order to allow for specifically targeted advertising, the lack of privacy is and will continue to be a staple concern of Facebook's users, and if restrictions come to being on how much information Facebook may release, its ability to draw advertisers, and in turn, a profit, will be substantially fractured which will inevitably cause investors to worry as well.
Now, to the most pressing issue for Facebook, how will the needs of the investors and the users be met simultaneously? Well, it is going to have to be a very methodical, precise balance if it is ever to work. Facebook, despite its mass following, has a very critical and fickle base of users. Even when the issue of privacy is disregarded, Facebook users complain about everything from new site layouts, to the new "Timeline" profile set-up (which, to be honest, could be much better). When people complain about Facebook I often ask them, if you don't like it why do you use it? The answer seems to always be a blank stare that appears to say "I don't know what would I do without it". Although Facebook does have its users roped in, an overdose of Timeline-like changes, or overkill in terms of advertisements, or a combination of the two could cause users to flock to alternative social networking sites such as Google Plus. For the most part, people use Facebook in their free time, in other words, not taking an interest in the advertisements on the side of the page. The same can be said for television, but there is a fundamental difference between the two; advertisements are mandatory on commercial television while it is essentially made optional on Facebook. This poses multiple problems, first of which, companies must wonder if these background advertisements are as effective as a similar advertisement on television or another website may be, and GM helped to answer that question this week. GM (GM) pulled ten million dollars worth of advertising from Facebook on the eve of its IPO, stating that there was little evidence showing that their advertisements actually had any impact on viewers whatsoever. Even other websites such as ESPN or Yahoo! occasionally have advertisements that spread to engulf the page which at least helps to catch the persons attention, but Facebook does not really have a means to do this. This is where the balance comes into question, if Facebook wishes to improve its means of advertisement, how will it do so without severely upsetting its users? It has already been referred to as "an advertising network" by Barbara Ortutay in yet another Yahoo! article discussing Facebook's privacy issues, so it seems that Facebook must find a more effective, efficient way to attract marketers and provide a performance that keeps them on the page. All of this stems back to the original question because clearly investors will be advocating for more and more advertisements (unless like I said, Facebook comes up with another method to display its advertisements) while users will demand for less and less. A medium can be found, but it will be extremely difficult to locate and if Facebook does begin to give investors preferential treatment, it is entirely possibly that it will lose the ever-important "cool factor" that lured in the millions of users in the first place, and its appearance will be replaced with that of a corporate nature which will ultimately come back to hurt Facebook.
Facebook's IPO is sure to have plenty of hype and demand, but that still does not mean that it should be bought. Facebook is special in the sense that it has such an astronomically large user base, but it still has plenty of problems that it must address, and all of which are threats to an upward trend in its stock price. Pointing to Zuckerberg's questionability as a mature leader, along with various privacy issues, it can be seen that the company has multiple, fundamental obstacles that it must overcome. GM has already shown its uncertainty about the effectiveness of advertising on Facebook, and if they are right, Facebook may have to revamp its means of advertising. However, it must do so while maintaining the "cool factor" or many of its users will be lost and there will be a much smaller audience to advertise to. Even when these problems are cast aside, the real question, as aforementioned, is how Facebook will manage to find a balance between the desires of investors and users, and this will be the key solution to be had if Facebook is to have long term success. There is a way to find an appropriate balance, but if done incorrectly not only will Facebook's users begin to search for alternative options in terms of social networking, but the stock will concurrently pay a hefty price.