
Why I'm not buying Facebook - arman0
http://finance.fortune.cnn.com/2011/01/04/five-reasons-why-im-not-buying-facebook/
======
nostromo
I remember how excited average investors were at the prospect of a new way of
going public when Google announced its innovative auction IPO. "Finally, Wall
Street banks wouldn't be able to crowd to the front of the line!" Their public
auction, their "don't be evil", and their continued use of their power for
good -- like their trick to get openness principles adopted during the
wireless spectrum auction -- all exemplified a company thinking and acting
like a good corporate citizen at all levels.

Contrast this to FB. They are actually cozying up to Wall Street rather than
eschewing them. "Don't be evil" was replaced with a series of privacy gaffes,
a flurry of lawsuits surrounding the company's founding, and a CEO who has
called early users dumb fucks. It's sad to see how Google's pioneering isn't
being emulated by the next big tech company.

~~~
code_duck
The behavior and culture of a company is often a direct reflection of the
character of the people who founded it. Unfortunately, very few 24 year olds
are mature enough to handle the responsibility and decisions that come with a
large corporation - even though the corporation may be successful, other
problems become evident. Take Etsy, for instance, another company founded by a
24 year old. While they have been successful overall, the company culture is
atrocious. It's not just youth that is the problem, of course.

~~~
noahc
Can you explain further about Etsy? Is this documented somewhere?

~~~
code_duck
There is plenty of discontent documented on the web, in blogs, on Etsy's
forums (which are difficult to penetrate, since the search and navigation
features are poor), on the forums of other marketplace sites, on Twitter, and
so on.

They have a knack for turning away people who should be their biggest
supporters. I can think of many successful shop owners have left after 2-3
years, disappointed by the way the site is administrated.

~~~
jswinghammer
Yeah this is my experience with Etsy as well. I have a poor opinion of the
company from talking to sellers who are friends.

I wrote a scraper of their site for friends to get their sales data for taxes.
Years went by before they bothered to implement this trivial feature. My code
worked because in two years their pages didn't change at all. Sorta crazy.

They seem to be getting better but I don't know.

------
portman
_"And don't give me that crap about VCs being "early stage" and wanting to
cash out of a "mature" investment. These people are as money hungry as any
other institutional investor, and would let it ride unless….they saw something
that suggested that the era of stupendous growth was over."_

The author doesn't seem to understand how the venture asset class works.

Venture funds are owned by their limited partners (LPs), and typically have a
fixed, 10-year life. After 10 years, the fund liquidates and the LPs
(hopefully) get a nice return on their investment.

It's been 6.5 years since Facebook's first venture investments. If the
investment vehicle was already 2-3 years old at that time, then they _have_ to
liquidate soon, even if the managing partners believe Facebook will continue
to appreciate in value.

The author seems to think that anytime an investor wants to cash out, it's
because they don't "believe" in the investment.

~~~
rogupta
Many VC funds have 1-2 years they can tack on in addition to the 10-year life
in cases where one or more of their investments have not exited.

That said, it's not the return multiple that matters for VCs, it's the IRR
(i.e. time is a factor).

------
mootothemax
_The market value of Goldman Sachs is just $88 billion. I'd take more than
half that company over the whole of Facebook any day of the week._

It's a fair point: if you had $50 billion lying around the place, which of the
two would _you_ choose to invest in?

~~~
portman
I remember when Goldman Sachs went public in 1999, only 12% of their shares
went public. The remainder stayed with the partnership. I'm not sure (or able
to quickly find) the current ownership, but it's certainly not _ALL_ publicly
traded.

So $50 billion would get you about one-fourteenth of Goldman. Not half.

Edit: grossly mis-remembered my facts. 511M shares include both stockholders
and the shares of the former partners.

~~~
krschultz
If I had $50 billion on this day to buy part of 1 company, I'd take Goldman no
question.

A few years ago if you got Facebook stock at a lower valuation, sure that
would make you a lot of money. But if Facebook makes $2 billion now, and they
already have 25% of the internet users as members, where does the growth come
from? 50b valuation is right given their current revenues, but they're not
going to go from 25% to 100% of total internet users. And their cost structure
will not go down to 0. So we're basically betting on how much more money
Facebook can squeeze out of each active user. I just don't see it being a huge
amount.

Where as GS has a lot of ways to make money, and has proven their ability to
make money over and over and over again through a lot of markets and a lot of
times. Facebook could peak at $100b and you only doubled your money. (Which
isn't that good for this kind of investment).

~~~
phreanix
While I'm sure it's a factor, I'm not convinced that Facebook's growth needs
involve having to increase their userbase in that manner. There are still many
ways to monetize the existing one since I don't believe they've done that very
efficiently yet.

~~~
joe_the_user
I think you're missing the danger that a lack of growth involves to Facebook.

Facebook isn't monetizing their existing customers and their customers are
there because "it's the thing" - all one billion of them or however many they
currently have. We aren't just there because everyone else is, we're there
'cause it's like a new club, a new experience, _new_ thing. NEW. If everyone's
on Facebook and it's just that dumb place that everyone on, then... the appeal
shrinks...

If Facebook growth visibly stalled, if I'm no longer having that interesting
experience of old acquaintances becoming newly visible, then suddenly the
process of _Facebook shrinkage_ appears. And if this is the moment Facebook is
visibly trying to get more out of me, then the shrinkage might really
accelerates.

I've seen just a couple friends quit FB recently. Not a big trend but I also
haven't seen more people join.

Imagine if ... it was ... the most ephemeral $50 B _ever_...

~~~
phreanix
I think Facebook's way past being the 'new' thing. People are finding a use
for it beyond 'old acquaintances becoming newly visible".

You have the average user who uses it to keep in touch with friends, but you
also have a growing number of users who are using Facebook in more and more
creative ways. I personally know a couple of hundred friends who have
thousands of pictures hosted on it (not something they'd give up easily), I've
seen my mother find all her elementary classmates and organize a reunion
spanning several states all within 2 months (surprised even me, I didn't think
she got past her yahoo email).

My point is, Facebook's utility for its users is still increasing, something
that stagnated in Myspace' case. We haven't even touched on the social gaming
aspect of it (If I see another cityville invite I swear I'll block them
fools). Growth to me involves more creative ways to involve its existing
users, as well as of course growing its numbers (which it is). There's still
the potential of its international users (which I believe is larger than its
US Mainland users), increased corporate/business identities on the site,
social commerce (barely touched), organized product reviews, that new mail
system it's supposedly rolling out, and so on. We can talk numbers, but
potential for monetizing their existing userbase appeals to me more.

------
nivertech
The only people what can make money on Facebook stock, is Chinese government
officials. All they need to do, is to accumulate $FCBK stock and then allow
Facebook.com to be used in China. Number of Facebook users will jump from 0.5B
to 1.5B, same with the valuation from $50B to $150B ;)

~~~
garply
They could do it twice. Buy before unblocking it and then short before
blocking it again.

~~~
nivertech
Then they should do many round-trips:

    
    
      1. Long $FCBK
      2. Unblock facebook.com
      3. Sell $FCBK 
      4. Short $FCBK
      5. Block facebook.com
      6. Cover $FCBK
      7. go to #1

------
frederickcook
"It's hard to see why, though: DST got in at a $10 billion valuation in May
2009. Facebook's user base has more than doubled since then. So its valuation
should…quintuple?"

Good point, according to Metcalfe's Law [1], it should actually only have
quadrupled.

[1] <http://en.wikipedia.org/wiki/Metcalfes_law>

------
InclinedPlane
Facebook has... twice myspace's revenue.

Just let that sink in for a while.

~~~
roadnottaken
Wait... is that good or bad?

~~~
InclinedPlane
It's troublesome if you want to invest in facebook. Facebook has 10x as many
users as myspace, and they've translated that into a great deal of hype. But
they've yet to translate it into sizable revenue, let alone into profit.

~~~
phreanix
Wait, let me get this straight. $2B in revenue is not 'sizeable' ?

~~~
InclinedPlane
Myspace hasn't released revenue information for 2010 yet. It's likely that the
ratio will change substantially in facebook's favor as their revenue has grown
considerably (assuming facebook's revenue reporting is trustworthy).

Nevertheless, Facebook's valuation is still shockingly inflated. Compared to
Apple they have 1/6th the valuation at 1/30th the revenue, 1/4th the valuation
at 1/12th the revenue of Google. It seems likely that Facebook is overvalued
by at least a factor of 3, perhaps more (since both Google and Apple are bound
by stringent revenue reporting rules).

At 1/6th the valuation of Apple (which is widely considered to be a bit
overvalued today as well) but with one 30th of the revenue (

~~~
jimbokun
"At 1/6th the valuation of Apple (which is widely considered to be a bit
overvalued today as well)"

I had also assumed that Apple was trading at a premium, before reading this.

[http://www.appleinsider.com/articles/11/01/03/verizon_iphone...](http://www.appleinsider.com/articles/11/01/03/verizon_iphone_predicted_to_earn_apple_respect_on_wall_street.html)

"Reiner noted that Wall Street investors typically grant companies with 70
percent earnings per share growth a "premium valuation." But AAPL stock is
valued at just 14 times its EPS, which is equivalent to the Standard & Poor's
average."

The fact that Apple is only trading at the S&P average relative to EPS, and is
still the second most highly valued company in the world, with 70 percent EPS
growth, puts into perspective what an absurdly good job they're doing.

~~~
chopsueyar
Keep in mind, they also actually make physical objects that exist in reality.

------
Swannie
One reason why I'm not buying Facebook:

I don't have $2mil lying around.

Another one;

Why is Mark so reticent to IPO? Because he loses control? Or because that
means making the numbers public, and people will see just where the money is
going. Either way, if the CEO doesn't want to go public and may be forced to,
that is not good.

~~~
SteveC
Bill Gates was another person who didn't want to do an IPO. He almost
cancelled it a number of times during the process as he felt it would just be
a distraction to actually getting real business done. Mark Zuckerberg could
have similar concerns.

~~~
Swannie
I didn't know that. It certainly sounds reasonable, but is that what happened
at Microsoft, after their IPO?

------
Loic
I do not have a FB account. You do not need FB to simply take benefit of the
web at large. But you do need a good search engine.

For me, FB is the future Second Life. Making money now and hyped, but at the
end, it will just be a simple good business, but not a stratospheric one.

~~~
arethuza
I don't use FB either (although I do have an account).

However, my kids use it all the time and it's a vital part of their social
life. I can sort of understand the valuation of FB - the people who use it
regularly _really_ depend on it and in a way that is much stickier than things
like Google search.

The only thing that I can see that might hurt FB is if it becomes too popular
and there is a mass switch by the "cool" people to use some other service -
given that it is based on socializing rather than hard features this could
well happen. However, I don't see any risk of this at the moment.

------
nhangen
"And any advertiser who is trying to target me on the social network is
wasting their money."

He ruined a perfectly objective point with this subjective generalization.

That being said, I'm with him for on most points, and I agree on the bigger
picture.

~~~
matthewcford
The future of Facebook is not targeting you on 'a social network', its opening
up an ad-sense competitor and targeting you on any website - with your
personal information. The like and connect buttons are just the first step.

With that in mind it sounds like a good deal to me.

~~~
yesbabyyes
I'm surprised how few people seem to see this opportunity. They should be able
to grab a huge part of online advertising.

Also, I have a feeling that a lot of big media would like to stick it to
Google, and would rather get their ads from Facebook instead.

~~~
matthewcford
Considering their TOS for the graph data - summary don't use the data to
target ads, its just a matter of time before they launch this.

------
draz
I was an early adopter of Facebook back in the day it was only open to a
handful of school (VERY early 2004). It was nice and exciting and whatnot. But
I've lost interest in it _completely_. I speculate that it's only newcomers
that find it interesting. I now use FB only as a means of sending someone a
quick note, getting invitations to events (a la evite -- remember that?), or
maybe looking up a picture I was tagged in by a friend. If back in the day
people put in their hobbies, activities, interests, and list of classes (yup,
that was available. Great stalking tool...!), I find people's profiles
completely empty. Anybody with a different experience? Do you ACTUALLY use FB,
or are you only drawn to it because of the reasons I outlined above? Please
note that I'm not hating on FB. They do what they do well. Just sharing my
experience (and at this point, I will never ever be able to get a job at FB...
;-) ).

~~~
abstractbill
_Do you ACTUALLY use FB?_

Yes. It probably helps that my family, and my wife's family, are all several
thousand miles away and we just had our first child. We spend a lot of time on
both FB and Skype, keeping everyone up to date.

~~~
draz
so why FB and not Twitter, for example? Is it the simplicity of having your
photo album and messaging under the same platform?

~~~
abstractbill
Integration of photos, videos and messaging is definitely useful, as is the
fact that all of our relatives have actually _heard_ of facebook as opposed to
twitter ;)

I guess the other consideration is that facebook at least has some semblance
of privacy, which is reassuring when posting photos and videos of someone too
young to consent (or talk, for that matter).

~~~
pilif
Thank you for your remark in the second paragraph. I was beginning to think
that I'm the only person on this planet concerned by all these "cute" baby
pictures being posted publicly.

Pictures which the person on it will likely be really ashamed of in a few
years.

Even though babies might look cute and you kinda might have "created" them,
they are real people, not pets or lifeless objects.

The same as you can't post pictures of a random person without their consent,
you really shouldn't post pictures of your child. Leave the posting of their
baby pictures to them, once they are old enough.

------
kia
"The market value of Goldman Sachs is just $88 billion. I'd take more than
half that company over the whole of Facebook any day of the week."

GS was founded in 1869; Facebook in 2004.

~~~
nir
GS has sustained its business over 140 years, consistently making a _lot_ of
money. (Also we recently found they are now, in effect, insured by the US
government in a way FB can only dream of)

------
far33d
Reason #3 shows that the author does not understand even the basics of virtual
goods and facebook platform monetization. The other points are nearly as non-
sensical.

~~~
chailatte
Please elaborate then, guy who works at Zynga.

~~~
brown9-2
I'll take a crack at it. Here the author seems to be claiming that to remain
popular and grow, Zynga and other Facebook-platform-users will need to have
razor thin profit margins like Walmart in order to reach as many people with
the lowest-common-denominator:

 _But here's the disconnect: if Facebook's future success depends on aiming
for the lowest common denominator with the most people possible, that implies
pretty slim margins a la Wal-Mart. You think they're going to justify a $50
billion market capitalization through banner ads? Are you kidding me?_

How does selling virtual goods - which are all profit - relate at all to
selling actual physical goods to consumers? Walmart drives the price down on
what it sells based on it's huge presence in the market. This analogy barely
makes any sense, and I have no idea what banner ads have to do with the
comparison.

Frankly I would say that Reason #3 reveals that the author has a hard time
making an argument in a concise or clear way.

~~~
mynameishere
He's clearly talking about the software and not the "virtual goods". Zynga's
games require all the engineering expertise required from WalMart's 2.99
gallon jars of pickles. Any other company that can deliver pickles in an
acceptable way can get right into that market. By contrast, try making a WoW
or Call of Duty clone. Huge, huge undertakings.

If you don't believe me, actually play some of Zynga's games. 50 percent of
the random shit on Kongregate is better by far. The difference is marketing
only.

~~~
lbrandy
Eh. Zynga is social games at scale. The engineering talent isn't in the games
part, it's in the scale part. Getting to that scale isn't any easy feat
either.

What you've basically just said is that any idiot could clone facebook. Yes,
they could. Except they still have everything to do.

~~~
bad_user
World of Warcraft has 12 million subscribers.

Any idiot can clone Facebook, getting users to use Facebook was the hard part.

Scaling is vastly overrated. Yes it requires knowledge, but (a) you don't have
to do it from the start (unless you're Blizzard and everything you do is an
instant hit) and (b) users don't fucking care about your infrastructure that
scales (that's not why they are playing your game).

------
patd
"Reason 2 : Goldman has likely earned the lead book runner slot in any initial
public offering."

When Microsoft valued Facebook at 15 billion, it was the same thing : they
paid 240 million for 1.6% of the company AND running ads on Facebook (while
excluding Google) AND some other things we may not know.

But people just said 1.6% for 240 million = 15 billion without taking other
parts of the deal into account.

------
palewery
Facebook is very similar to vmware. I expect it would follow a similar path in
stock price. Currently vmware is trading at 140 p/e ratio. People are afraid
to miss the next Google, Microsoft, etc.. SO they are willing to buy the
latest trend. If facebook made $2 a year off 300M users they would have a
market cap of 60B with a 100 P/E ratio.

~~~
nas
> People are afraid to miss the next Google, Microsoft, etc

Yup, and they don't realize that it's not a winning strategy. Of course I
would love to get in on the "ground floor" of the next Microsoft or Intel.
Unfortunately it's like trying to get rich by buying enough lottery tickets.
Sure one of them is going to be a big winner but the EV of your investment is
negative.

------
lionhearted
> Let's just say for argument's sake that it is early stage investors who are
> selling. Why would they sell? Because they're in need of cash to invest
> somewhere else? The way the social network is talked about these days, it's
> the best investment opportunity in town. So why would anyone want to forsake
> it?

What a silly argument.

Diversification. Duh.

Even if you've got a hold of what you're certain is the biggest, bestest, most
badass-est investment ever that's already gone up 20x, you'd do well to cash
out a bit of it and spread that around. On the off chance something crazy
happens, you're not up the creek.

I mean, that's not exactly revolutionary right? Diversify? If I owned Facebook
equity now, I'd really happily cash some of it in and invest in something as
uncorrelated to FB as I possibly could. Like, real estate in Bulgaria or
something.

------
bemmu
On Zynga: _You think they're going to justify a $50 billion market
capitalization through banner ads?_

These games actually do really well, not from banner ads but from virtual
currency. Now that FB is pushing devs to use FB credits, they should be in for
a healthy cut of the action.

~~~
nas
Games like Farmville are a fad, like Rubix cube and Cabbage Patch Kids. That's
not to say that casual games won't continue to an important segment of gaming,
just that they will not provide an income stream that justifies a 50 billion
company valuation. If it wasn't for the fact that "the market can stay
irrational longer than you can stay solvent", I would short a Facebook IPO in
a heartbeat.

Facebook's core value is that (nearly) everyone is on it and it is considered
to be "cool". The cool aspect will not last. I'd be amused to hear any
arguments as to how it possibly can. Young people _will_ move on to something
else.

I also think it's very likely that their power as a centralized manager of
personal contacts will be eroded over time. Really, it's not that hard of a
problem and some other applications will end up being compelling enough for
people to switch. They will try to prevent it (e.g. like trying to prevent
GMail from exporting email addresses) but ultimately will fail.

The history of the Internet is filled with the corpses of technologies that
were supposed to be "the future". Who remembers PointCast? How about Orkut?
For a while RSS was touted as the solution to all of mankind's problems. ;-)

~~~
blader
"Games like Farmville are a fad, like Rubix cube and Cabbage Patch Kids."

Well, sure they're fads. But _toys_ aren't a fad.

LOST might be a fad, but _entertaining content_ aren't a fad.

Farmville might be a fad, but Zynga is in the content business, not the
Farmville business.

------
cincinnatus
If these guys precipitate a bubble burst we should all hate them.

2011 is the year Facebook growth (users, hours, page views, pick one)
plateaus, it is inevitable it will happen as some point, and this is very
likely the year.

~~~
lsc
we shouldn't, really. I mean, they practically /made/ the bubble, and I think
we've all profited from that, even those of us who don't work for google.
Demand for webapp dudes (and infrastructure) is way up because of this bubble.
Hell, my own biggest account does some kind of facebook app thing.

------
tpatke
Nobody has mentioned acquisition. I think it is safe to say that MSFT would be
interested in FB at 50B. 100B starts to look like real money and it is hard to
know who would be interested...

------
kylelibra
Another reason I'm not buying Facebook:

I don't have the $10 million required by Goldman Sachs to be involved.

------
malloreon
Question: what is the point of Facebook?

Answer: monetizing friendships

~~~
cincinnatus
'friendships' FTFY.

------
known
Facebook will fade away like Hotmail.

------
apriori
Bernanke -> Goldman -> Facebubble

------
sdh
1\. because this article is on CNN and our formula for getting visitors is to
find a popular current event and take a controversial or contrary point of
view on it.

2-5. see #1

~~~
user24
That's a rather simplistic view of the article, don't you think?

You really think that none of the reasons are genuine, all just made up as
linkbait?

