Will the Facebook IPO Ruin Facebook?

With Facebook’s IPO today, the big question has been how Facebook is going to raise revenue to fit with stock valuation. There are several options, and many of them involve more ads: pushing more ads onto mobile interfaces, more ads in general, more narrowly targeted ads, more back-end data sales, further expanding Facebook Connect, and further expanding Facebook Payment. In all, though, I think Facebook’s best option is to reconcile revenue and valuation the other way around. Don’t raise revenue to fit with valuation. Instead, let the bubble burst.

So much of Facebook’s success has to do with network effects, not with the quality of the site itself. Just as a telephone represents little value to you until and unless people you want to talk to have telephones as well, so too Facebook is valuable to users primarily because a great many other users are also there. Now, surely, there are things Facebook could do that would drive more users away, and there are things that Facebook has done very well, but for the most part we go to the site because of network value (we want to talk with our friends and share pictures with family), not because of intrinsic value (the site itself is good per se).

This gives Facebook something of the character of a utility. We just want it to work, and for the company itself to be as unobtrusive as possible. The only good conversation with your cable provider is no conversation. Nobody likes thinking about their phone plan.

Facebook’s encroachment into the user experience and into user data is precarious, and perhaps already overextended. If Facebook were one site among many, from which we could freely choose what we preferred, there would be little issue with cutting new bargains with users—but the fact that what Facebook primarily offers to the user is nothing other than its own wide adoption means that it has a de facto monopoly. So if we don’t like the deal they offer us—e.g. the tradeoff between data privacy and number of ads—we can’t just walk away from it to another service provider (unless we convince most or much of our network to walk away with us).

The monopolistic, public-utility-like aspect of Facebook’s business model of trading on network effects ought to make users concerned that they may be exploited or abused. And so they should be! Where network effects inhibit competition that might otherwise bring about market-based regulation of corporate behavior, we are left with little recourse but to hope that a company will simply choose to treat users fairly. And indeed, there seems to be more and more anti-Facebook sentiment, even in college kids; my students today are usually wary of or troubled by Facebook, where only a few years ago my students were generally uncritical of it. The fact that discomfort with Facebook is so often expressed on Facebook itself is neither ironic nor hypocritical; instead it is simply reflective of the problem: the fact that it’s the only place to have a conversation along with several hundred friends and contacts makes it both deserving of concern and discussion, and at the same time an unparalleled location to voice that concern and to have that discussion.

Facebook has managed to maintain this precarious position so far, but a step in any direction risks a fall. More ads on either the standard or the mobile site will most certainly annoy users. They likely will be perceived by some as crass and trashy, although users will, I’m sure, tolerate them so long as there remains no real alternative. A further complication is the targeting of ads. Right now, most everyone seems to be getting “dumb” ads: broadly-based ads, not the narrow targeting that Facebook’s data analytics promises; no more demographically well-informed than a billboard in one section of town rather than in another. Combined with the abysmal click-through rate of online ads, this is not a terribly impressive sort of ad to sell. But, as Target reportedly discovered in the recent Case of the Pregnant Teen, well-targeted advertising can quickly become creepy.

Selling data from the back end presents its own problems. Facebook has to let purchasers and investors know what kind of saleable demographic trends and correlations they can mine from their unprecedented data stores—but the more valuable that information seems to be, the more Facebook will draw the scrutiny of regulators and the ire of users. There’s a similar catch-22 with Facebook Connect and Facebook Payment: as Facebook further leverages its de facto monopoly into increased ubiquity and indispensability, the perception of its economic value will be tied to awareness of its anti-competitive effects. How much further can Facebook expect to expand before conversations about the Sherman Antitrust Act arise again?

It’s true enough that a public company has certain obligations, both legal and moral, to shareholders. These obligations, notably, do not include sacrificing long-term profits and viability in the name of short-term return on investment. Many companies no longer exist today because they learned too late that working for the quarterly report is a poor form of stewardship. (Or, put more cynically: the public LLC structure is built to focus on the short term, and executive compensation through stock options encourage cycles of overvaluation and collapse.) With the large percentages of shares being retained by Mark Zuckerberg, Eduardo Saverin, and other previous owners—along with Zuckerberg’s values-based letter accompanying the IPO—it seems like Facebook is welcoming public ownership on its terms rather than being transformed by an imagined need to sacrifice fundamentals in the service of the stock ticker.

And so I suggest to Facebook: stick with what’s working. Don’t offend users’ sensibilities and make Facebook feel tacky and unfriendly and monetized through a new barrage of ads. Don’t creep users out by mining and selling ever more detailed data about user demographics. Don’t make users feel trapped by expanding out Connect and Payment and making Facebook ever-present, unavoidable, and stifling. Do not build a tower on these shifting sands, pushing revenue to reach ever-greater heights, but instead let the stock values fall to earth. Push us too far, and we will break you or abandon you; you will go the way of either Ma Bell or MySpace.