Is Facebook Really a Good Business?

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Feb. 2 2012 6:14 PM

Is Facebook Really a Good Business?

It’s nothing without its users, and we’re a fickle bunch.

Mark Zuckerberg
Mark Zuckerberg and Facebook are preparing for the social media giant's IPO

Justin Sullivan/Getty Images.

Facebook is the strangest Internet company ever to make it big. Compare Mark Zuckerberg’s site with Amazon, which just wants to sell you stuff—an old business in a new medium. By contrast, Facebook’s all-encompassing mission to “make the world more open and connected” seems positively zany. It’s not only that Facebook is ambitious; lots of Web companies, especially Google, strike the same revolutionary tone. What’s different about Facebook is its product: Facebook is us. You go to Google for Web pages, you go to Apple for computers, and you go to Amazon for stuff. What does Facebook give you? Me and you and everyone we know. Or, to quote another movie: It’s people! Facebook, is made out of people!

If this doesn’t strike you as a crazy platform on which to build a billion-dollar business, it’s only because you’ve used Facebook long enough to be seduced by its inevitability. But consider how novel the social network is, as a concept. Even though Facebook is named after a real-world object, the site has no analogue in the offline world—before social networks, the idea of a worldwide map of people and their relationships didn’t exist. Indeed, you don’t have to think back too far—probably to 2005 or so—to get to a point where it would have been insane to suggest that people of all ages in every country would voluntarily disclose everything about their lives to a single website. And, on top of that, that the company behind the site would make a grand profit by using this information as a way to serve up ads. And, finally, that we’d all have fun doing it.

Much of Facebook’s S-1—the document the company filed yesterday to kick off its initial public offering—functions as a detailed warning to investors on the risks the company faces on its path to becoming a world-changing business. Most of these risks seem unlikely—the death or resignation of Mark Zuckerberg, the mass infiltration of malware, a terrible undetected programming bug that brings Facebook crashing to the ground.

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The warning that the document lists first, though, should not be so easily dismissed: If we fail to retain existing users or add new users, or if our users decrease their level of engagement with Facebook, our revenue, financial results, and business may be significantly harmed. What follows are several bullet points noting the various ways people could sour on Facebook. Together, they highlight a fact that gets lost in the giddiness over the company’s revenues. As successful as it’s been so far, Facebook is still something of a tenuous experiment. It’s an enormous business built on the theory that it is possible to collect, store, and mine information about everyone’s lives—and to delight both consumers and advertisers in the process. Facebook’s financial disclosures prove that the experiment has paid off handsomely.

But how do we know that this success will continue? Unlike Apple’s or Google’s raw materials—chips and touchscreens, Web pages and videos—Facebook’s main ingredient is ordinary people all over the world. And people are known to be a restive, fickle, crazy, unpredictable bunch. Is it really so wise to invest in us?

I’m not arguing that we’ll all leave Facebook for some other social network. As I’ve said before, that’s crazy talk. Instead I have a more general skepticism about the utility of the “social layer” that Facebook wants to build under the entire economy. In a letter to potential investors, Zuckerberg argues that most products and services can be improved by making them “social.” This has become received wisdom in the Silicon Valley; nowadays every site, app, game, and store plugs into some kind of social network, often Facebook.

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