by Jeff Reeves | February 2, 2012 1:19 pm
If you believe Mark Zuckerberg’s sanctimonious letter to prospective investors, Facebook apparently is all about altruism — not turning profits. According to Zuck, “We don’t build services to make money; we make money to build better services.”
You can read the whole letter from Facebook’s S-1 filing with the Securities and Exchange Commission here. But frankly, I wouldn’t bother. It doesn’t say a whole lot of anything.
What the Zuckerberg letter does do, however, is raise some serious questions. There are a number of very difficult contradictions that arise which should make Facebook users seriously doubt the company’s altruism and should make investors think twice.
Here are five hard questions Mr. Zuckerberg has to answer after his recent letter:
Zuckerberg’s letter begins, “Facebook was not originally created to be a company. It was built to accomplish a social mission — to make the world more open and connected.”
So I’ll start with the $5 billion question everyone should wonder: If it’s not about getting filthy rich or turning Facebook into a corporate monstrosity, then why go public at all?
If you truly believe in free and open communication, then why not go the route of Wikipedia or Mozilla Firefox or WordPress or countless other digital creations that are open source and not-for-profit? Or why not stay a private company, turning a small profit but answering only to yourself?
Take Craigslist. It’s a true social company — Craig Newmark barely monetizes the classified and message board giant. It’s all about connecting people and it remains wildly popular. Profitable? Not so much. But social legacy? Mission accomplished.
Zuck writes, “These days I think more and more people want to use services from companies that believe in something beyond simply maximizing profits.” But maximizing profits for shareholders is inherently the business of a publicly traded stock. That’s why investors demand quarterly reports, and Wall Street sometimes punishes rapidly growing companies for not growing fast enough. Take Ford (NYSE:F), which recently posted year-over-year profit growth of $463 million — then saw Ford stock slammed with an 8% decline immediately afterward.
Facebook is voluntarily entering the greedy world of Wall Street and pretending like money doesn’t matter. That’s an impossible line to walk.
Facebook financials show $3.5 billion in cash on hand for the social media giant. It will turn roughly $1 billion in profits this year. It is going to raise $5 billion in an IPO.
So Zuck, I have to ask: How much money must be glued to your Facebook wall to make services tip-top? After all, this isn’t a capital-intensive business like manufacturing. There are no raw materials to buy or costly production machinery to upgrade.
The great things about many tech companies is that they can start from nothing and succeed on a good idea and little else. Take the flagship product of Google (NASDAQ:GOOG), its search algorithm. I suppose there’s “upkeep” in the form of programmers tweaking the code and server space to make AdSense work. But that’s about it.
Why else do you think Google has a staggering $44 billion in cash on its balance sheet? It literally has more money than it knows what to do with, toying with cars that drive themselves and offshore windfarms and still turning an obscene profit.
In short, either Facebook is just another corporation hoarding cash for no reason, or Facebook is daydreaming about its own self-driving vehicle projects.
Let’s give Mark Zuckerberg a break for a moment. Let’s assume Facebook is a glorious, altruistic company that just wants to facilitate information sharing and make the world a better place. It went public not to make anyone rich, but to fund a brave new mission to take Facebook’s current operations to an even more dramatic scale.
OK. Then what’s the plan, Zuck? What comes next in this big scheme?
Just about the only concrete growth plans I can find are reports indicating India is a big opportunity for Facebook. Its user base in the country has more than doubled in the past year. However, signing up more people isn’t a step change — even if there’s the potential for significant growth this way. China is the same story, if and when Facebook makes a push into Asia.
There are hints at news aggregation or even original reporting, judging from a variety of domains registered around the phrase “Facebook newsroom.” Construction planning documents from the city of Menlo Park, Calif., also hints Facebook intends to house about 9,400 workers by 2017.
But nothing concrete has emerged, and certainly nothing that sounds worth $5 billion. If the plan was just to do business as usual and play around within the company with new ideas … what the heck is the $5 billion IPO for?
Other than funding the vanity of a massive corporate campus, of course.
It’s impossible to get a handle on many Facebook metrics. But here’s one that, while slippery, is at least worth acknowledging:
A 2011 report from Inside Facebook says the social network’s growth has slowed down in the mature U.S. market. The service saw nearly 6 million users depart in a single month last year. A drop in the bucket, sure, since Facebook has some 150 million folks in the U.S. with profiles. But not a good sign. Canada, the United Kingdom, Norway and Russia all lost more than 100,000 users each in the same period.
We can’t tell what Facebook’s growth looks like until a few quarterly reports are filed post-IPO. But the bottom line is that even if we grant Facebook some continued organic growth, eventually it will reach critical mass. Not because Facebook is a bad product or because a competitor is gaining ground, but because that’s how these things work.
The reality is that all fast-growing tech companies eventually experience a flattening out of growth in their core products. They need a second act — for Amazon (NASDAQ:AMZN), it was the movement from books into flat-screen TV sales, then into ebooks and currently into streaming video. Or take Apple (NASDAQ:AAPL) — Steve Jobs didn’t turn Apple into a powerhouse thanks to its Macs alone, but thanks to the iPod followed by the iPhone followed by the iPad.
Admittedly, you can make plenty of money on a mature product. Microsoft (NASDAQ:MSFT) and Windows are the perfect example of this. But Microsoft also is the perfect example of a stagnant, mature company without a second act — which Wall Street has written off as dead money. Amazon wouldn’t have gone out of business if it stuck to just selling books. But it wouldn’t have grown, either.
Once you take a company public, you cannot accept the Microsoft model. Investors demand growth, even for a dominant company. So muddling through with India and China signups might work for a few years … but what’s next?
And once again, I have to wonder what the $5 billion in IPO funds is for.
Investors might want to pooh-pooh some of Zuckerberg’s letter as just sound bites for the PR machine, the musings of a silly twentysomething who doesn’t understand big business.
But what if Zuck really means what he has written?
Remember, Zuckerberg will maintain more than half of the voting rights for this company after its IPO. He also will not answer to an independent board, as CEOs of other publicly traded stocks do. So he could conceivably tell investors to shove it if they complain about profitability or revenue growth.
If that happens, then the idea of an IPO really becomes absurd. Why create the media circus and Wall Street shenanigans if you never intended to allow public shareholders a say in your company? Why welcome in money-hungry investment banks and then get upset when they inevitably ask for bigger profits?
Investors who truly believe in the Zuckerberg way might be pleased to see that he has a large amount of control in the company he created from scratch. And surely other tech entrepreneurs dating back to the time of Bill Gates figured it out.
But the difference is Bill Gates saved his altruistic mission for his foundation, and the noble work he provides with his wife, Melinda. He was a businessman at Microsoft, and a humanitarian outside of the office.
It’s awfully idealistic of Zuckerberg to pretend like he can achieve both roles at Facebook. It’s also more than a little naïve.
Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace???.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. Jeff Reeves holds a position in Alcoa, but no other publicly traded stocks.
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