Facebook's Googly IPO delivers on Sun man's vision
Selling data ain't like shiftin' boxes, boy
History may record Scott McNealy as a straight-dealing leader of a major Silicon Valley tech company.
In 2006, the grinning chief executive and co-founder of Sun Microsystems stunned journalists attending one of his company’s events by calling online consumer privacy a red herring. ”You have zero privacy anyway,” he said bluntly. “Get over it.”
McNealy had been responding to a question about the implications on privacy for Sun’s Jini, which was supposed to have allowed Java devices to connect and share computing resources.
Back then, McNealy was box-happy: Sun might have invented Java, but the majority of its business came from selling Sparc and Solaris to the eBays and AT&Ts of the world.
Privacy advocates and Mozilla might argue that the web and privacy are not antithetical, but McNealy’s answer was pure Silicon Valley at its simplest: technology first, money second... and privacy – well, that’s just a socialist European idea that gets in the way.
Facebook’s IPO filing and McNealy’s echo from history should remind us of two things: firstly, how the ethos of Silicon Valley hasn’t changed, and secondly that today’s giants – the latter-day Suns – are also working in a world where making money isn't as clear-cut or predictable as selling a server to some telco or a website, much as they might be trying to convince you otherwise.
Stapled to Facebook’s IPO filing is the obligatory CEO letter, a piece of creative writing Mark Zuckerberg has used to convince investors that his company is somehow different. Mission, not money, was the genesis of Facebook, he tells us. “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,” he says here.
This kind of West Coast “we’re different” hymn was also sung by Google during its 2004 IPO, an event many are seeking to compare to that of Facebook today. “Google is not a conventional company,” Larry and Sergei gushed in their IPO letter of the time. Last year Groupon also tried the same trick, telling Wall Street's moneymen that the web alchemy it uses to bring in the dollars is such a mysterious and a different art to the standard rules of accounting that “we don't measure ourselves in conventional ways."
Fortunately, the rules of accounting are the rules of accounting, and Groupon had to alter its reporting. The rule of absolutes doesn’t apply to statements of principle, however, and we must allow events to run their course.
Back in 2004, Google’s co-founders tied not being conventional to not being "evil". "Don't be evil" translated as not loading Google’s search results: “We will be better served – as shareholders and in all other ways – by a company that does good things for the world even if we forego some short term gains,” the pair wrote. Also, Google would: “Make the world a better place" by connecting people though free services such as Gmail. Google wouldn’t shy away from risk, they said, meaning: “We may have quarter-to-quarter volatility as we realize losses on some new projects and gains on others.”
Privacy for one of the world's largest aggregators of data? Meh. “We know that some people have raised privacy concerns, primarily over Gmail's targeted ads, which could lead to negative perceptions about Google. However, we believe Gmail protects a user's privacy,” Google's founders wrote.
Don't be evil anymore
Since then, Google has been accused of loading its search to exclude competitors; its financials have been pretty much consistently reliably huge; and adventurous but low-yielding projects have been axed so that the company can focus on Microsoft and others – while Google has taken the daring step of launching Facebook and Twitter clones.
And as for the “Don’t worry about privacy, leave it all to us” routine, Google is now merging people’s profiles across 60 products with no option to opt out.
Back to Zuckerberg. His IPO letter is also padded with Googly type IPO vision; this time it’s about helping people connect and maintain relationships, about changing society, the economy and the world. “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.”
If Facebook were a charity this would be credible, but Facebook isn’t; it’s a commercial enterprise trying to make money from its biggest single asset: holding the dish on 845 million people. Strip out the candyfloss and Facebook’s business cogs soon reveal themselves.
Facebook 'Likes' you
What we have is a company that roughly doubled revenue and net income between 2010 and 2011 while net income has remained at about a third of revenue.
Growth is paramount, both in revenue and users. This is because the first is predicated in part on the other, thanks to the fact Facebook is a free service for end users but charges the advertisers who target them.
Advertising is “substantial” part of the Facebook business, the filing says, any loss of advertisers or a reduction in ad spend could “seriously harm our business”. With growth stalling in the US, Facebook is looking for new users abroad: Brazil, Russia, India, China and South Korea.
Growth in mobile is key, both in terms of reaching more users in different places and in serving ads to devices – something Facebook doesn’t currently do.
To achieve growth, Facebook must find new ways to exploit the data that it has on 845 million people, and do so while remaining legal.
Facebook is working to achieve that with the Like button and with Timeline, which respectively tease out more of our preferences while also making data that's already in Facebook easier to find. Ultimately both features will help with the targeting of ads by partners. Timeline and Like are easier to sell as features for the end user and they show that Facebook has come a long way from the days of Beacon, a feature for advertisers billed as being "for people", but which crudely sent data about sites you’d visited back to Facebook’s ads system for targeted ads.
Based on Facebook’s history and its future needs, it is likely Facebook will continue to be tripped up over what it does with the photos, status updates and messages of the 845 million people who use the social-networking site.
Beware privacy rules
As such, Facebook’s IPO points to the prospect of running up against regulators. “Our business is subject to complex and evolving US and foreign laws and regulations regarding privacy, data protection, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could harm our business,” it says.
This is IPO boilerplate, but given Facebook's business is mining people's data and that clouds are already gathering, this chapter on regulatory change is painfully pertinent for Facebook.
The ascendancy of Google, Facebook and others has made it hard to hide from the hungry eye of advertisers, and while we might not have liked what McNealy said, Sun's former CEO was right in his observation – ahead of the game, even.
The problem part is "getting over it” – and it's a problem not least for today’s crop of Silicon Valley giants, who would rather we love them than explain exactly how they’ll make money from our data. ®