America’s long slide into economic eclipse continued this week with the announcement that Facebook is buying Instagram for $1 billion. What? You’ve never heard of Instagram? It’s a photo-sharing application for iPhones that was developed by two twenty-somethings. The company has about a dozen employees, no revenues nor even a business model, so it’s safe to say that Instagram has almost zero impact on the U.S economy. Let’s hope the venture capitalists and corporate insiders who have struck it rich with this deal spend their money – all of which will come from the pockets of infinitely greater fools – wisely. We only wish that Eastman Kodak had thought of Instagram first, since all of the patents the now-defunct Rochester company holds are unlikely to fetch anything close to a billion dollars.
Spreading the Wealth
Meanwhile, The Boyz on Sand Hill Road can only hope that Facebook founder Mark Zuckerberg continues to spread the wealth like so much litter on the sidewalk. Arguably, the billion he just dropped on Instagram is likely to reap greater returns than the hundred million dollars he donated to Newark’s school system. In any event, the acquisition, if not the price, makes sense, since photo-sharing has been a key attraction of Facebook. And let’s not overlook the fact that Zuckerberg has one less would-be competitor to worry about. Not that anyone about to reap a multibillion-dollar IPO bonanza should be worried about anything. It is America that should be worried as the May date approaches for Facebook’s IPO, an offering expected to be worth as much as $100 billion. How, we should ask, can a company that produces absolutely nothing be worth so much? Chalk it up to the madness of crowds. Beyond the rhetorical question, however, there is an economic one: With its reported 850 million subscribers, how much is Facebook actually worth?
In the 1950s and 60s, the same question was often asked of U.S. companies contemplating doing business in China. Sell just one bottle of Coca Cola to every Chinese man, woman and child, the thinking went, and a company could hit the jackpot. Who knew that the Chinese would ultimately forge licensing agreements with the likes of Coke that ensured that most of the profits stayed in China?
Biggest Challenge
In trying to monetize 850 million pairs of eyeballs, Facebook will face a different kind of challenge – one perhaps even more daunting than hard-nosed deal-makers on the other side of the negotating table. Since most of their revenues will necessarily come from advertising – another business, by the way, that adds nothing of substance to the U.S. economy — Facebook can grow its relatively paltry bottom line only by getting in subscribers’ faces more and more aggressively. That’s not going to sit well with the desk-potato set – does not sit well with quite a few of them already. For in fact, subscribers’ personal data is being used in ways that would appall them if only they knew. Let me illustrate. On a recent morning, a thumbnail picture of three bikini-clad hotties (see above) appeared on my own Facebook page under the tagline, “Supermodels without photoshop (sic)”. It is unclear whether the Facebook friend who put it there even knew he was doing so; just as it is unclear, whenever we click on ANY item on ANY Facebook page these days, whether we are abetting the creation of a daisy chain of personal information of the sort that gives ad-men and marketing gurus wet dreams.
As for the three hotties, when I clicked on the picture to get a better look, a Yahoo! message appeared warning that an “app” would be downloaded onto my hard drive to collect my “basic info” (??), my e-mail address, birth date and Facebook “likes.” This might seem innocuous, especially to the teeny boppers who comprise Facebook’s core demographic. But the uses to which such data could be put, in conjunction with other data collected on us whenever we browse or click, boggles the imagination. We already described here how retailers have learned to “triangulate” discount-coupon data so that they can “detect” when a female shopper is in her first trimester of pregnancy. Pretty clever, right? This feat pales in comparison to what they’ll be able to do when Facebook et al. have had a few years to compile reams of data on individual users.
A Legal Firestorm Awaits
Our prediction for Facebook as an investment is that shareholders had better prepare for a firestorm of privacy suits. Although it seems unlikely that plaintiffs will lose any of these battles, heaven help us if they lose the war, since an unchecked Facebook would surely come to know each of us far better than most subscribers – even the young and ignorant – would care to be known. Legal issues aside, it will become increasingly obvious – and offensive — to subscribers that they are being scientifically packaged and sold to marketers in insidious ways. It is predictable that a Facebook privacy scandal will shake the company to its core, causing customers to revolt and the stock to drop precipitously. You read it here first.
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