The Lowdown » The Facebook Effect

A Brief History of Social Media (in just over 140 characters)

Mark Lukach — Tue, 03 Apr 2012 23:48:03 +0000

In February 2012, Facebook announced that it was filing for an IPO. The company, launched out of a college student’s dorm room just 8 years before then, is now estimated to be worth somewhere between $75 billion and $100 billion.

Despite the large impact it has on so many of our lives, it’s important to remember how new social media really is. How did it become a multibillion dollar industry so fast? Scroll through the timeline to learn the short of a very big idea.

How Does Facebook Turn Our Info into Cash?

Mark Lukach — Wed, 07 Mar 2012 02:43:21 +0000

This is kind of the $100 billion question: how is it possible that a website offering a completely free service will soon be worth about $100 billion? Put another way, how do they make so much money without charging us a cent?

The bulk of Facebook’s revenue comes from straight-up advertising. Sure, they have a few paid features, but it’s a specific kind of targeted advertising that really rakes in the dough.

As you go through your digital life on Facebook - tagging yourself in photos, “liking” status updates and TV shows, and checking in at various physical locations – you are giving up an incredible amount of information about yourself. And it turns out that all those little details – like your age, where you live, and what you “like” – are super valuable.

Facebook collects all this information and sells it to very hungry advertisers who then use it to create ads that are specifically tailored to you. So when you log into Facebook, you now see ads for stuff you’re likely to be interested in. And that, of course, increases the chance that you click on the ad, which increases the chance you eventually buy it.

To put it simply, Facebook deals in personal data. The more it knows about us, the more advertisers will pay for that information to better get our attention.

So, is Facebook really free?

Kind of depends on how you look at it. On the one hand, when you use Facebook, you’re receiving a pretty extensive service and not paying a dime for it. But on the flip side, there’s no such thing as a free lunch: you are sacrificing privacy, and potentially giving up a lot of your personal information. And Facebook is collecting that info and profiting from it – big time. Of course, you can manage your privacy settings on the site in order to limit how much you actually reveal about yourself. But even the most cautious users is are giving away crucial information by simply creating a profile and logging in. So, in a sense, the answer to the above question really depends on how much you value privacy.

See what Stephen Colbert and others have to say about this …

Why Facebook Is Going Public (and how it made one graffiti artist rich)

Mark Lukach — Wed, 07 Mar 2012 01:47:37 +0000

Facebook CEO announces his company's plan to go public (credit: Justin Sullivan/Getty Images)

When Facebook filed for an Initial Public Offering (IPO) in February, Mark Zuckerberg wrote a public letter outlining Facebook’s mission: to bring the world closer together. With the additional investment money that an IPO would bring, he explained, Facebook would have the resources to better reach that goal.
Or, to put it another way, when Facebook goes public, it stands to make a whole lot of money. IPO’s can be a good way for companies
to have access to a lot of funding fast, expand their businesses quickly and, in theory at least, make even more money (remember that whole “you gotta spend money to make money” thing?).

Think about some of the recent Facebook features like Timeline, Newsfeed, or video-chatting. More investment in Facebook means more innovations that can be more quickly designed, implemented, and, most importantly, turned into profitable applications.

So what’s Facebook actually worth?

Keep in mind that the “I” in IPO refers to just the initial chance that a company going public has to raise cash. Facebook is hoping to get as much as $10 billion from their upcoming IPO (the company will likely go public by early summer). Not too shabby, right? But that’s only a fraction of what the company actually thinks it’s worth. And therein lies the big question … How much?

In 2005, a graffiti artist painted Facebook’s office walls and got paid in stock options that soon will be worth about $200 million.

No one really knows for sure. The company made $3.7 billion in 2011, but that’s nowhere near how much industry experts think the company is actually worth or what it will be worth in the near future.

In going public, Facebook has to open its accounting books and let outsiders finally get a better sense of how much the company makes and how it makes it. From there, investors will speculate its actual worth. Experts are already anticipating that Facebook’s actual value will be somewhere between $75 billion and $100 billion.

To put that number in perspective (assuming it’s reasonably accurate): if Facebook were a country, it’d have the 59th highest gross domestic product (GDP) in the world, putting it between Vietnam and Morocco!

Why will this make some Facebook staffers very rich?

Similar to what happens in many start-up companies, Facebook offered some of its first wave of employees a small percentage of ownership (shares) in the company in lieu of big salaries (which it couldn’t afford to pay at that point). The idea rests on the hope that some day the business becomes really successful and goes public, and those employees then get to cash in.

And that’s exactly what seems to be on the verge of happening. Big time..

As long as Facebook remains a private company, those stock options aren’t worth diddly because the company has no stock market value. But with its likely very lucrative IPO in sight, that $100 billion price tag suddenly becomes relevant. And all of a sudden, those employees who for years have been sitting on seemingly worthless stock have really big smiles on their faces.

The Breakdown

Imagine if you were one of those early Facebook workers and were given, say, 1% ownership in the company? If the company actually ends up being worth $100 billion, you’d suddenly be sitting on $1 billion in shares. Not too shabby!

Now to be clear, not all Facebook employees will get super-rich. A majority of the company’s roughly 3,000 staff don’t have hefty stock options built into their contracts. But, a lot of them do! It’s been widely estimated that Facebook’s IPO will create about 1,000 millionaires and a dozen billionaires among its employees and early investors … pretty much overnight!

So, for instance, take Mike Schroepfer, Facebook’s vice president of engineering. He owns a little over 2 million shares in the company, which sounds like a lot, but it’s only about .1 percent of the total. Now assuming the company is actually worth between $75 and $100 billion (let’s split the difference and call it $87.5 billion), that’d make Schroepfer’s holdings worth about $98 million! (source: Business Insider). And then you have Zuckerberg himself – the majority shareholder, who owns almost 30 percent of the company. What does that amount to in stock? Try $25 billion.

The world’s richest graffiti artist?

Remember that not all of these people are actually Facebook employees. Some of them are early investors in the company (those guys who took the initial risk and gave Zuckerberg and his pals a bunch of start-up funding). And then there are a handful of folks with some random, quirky connection to Facebook and now stand to cash in big. Take, for instance, graffiti artist David Choe who was hired in 2005 to paint some wall murals in Facebook’s first headquarters. Back then, though, the company hadn’t made much money, so offered to pay Choe in stock instead of cash. He did the job, got some stock, and now stands to make about $200 million. So much for the starving artist.

Does California stand to benefit?

Facebook’s headquarters are located in Palo Alto, and most of the overnight millionaire/billionaire employees live

in state. As a company based in California, Facebook will pay taxes to the state, and as residents, it’s employees will pay a state income tax, which is proportionate to what they make.

For cash-strapped California, this is potentially really good news. The state’s Legislative Analyst’s Office predicts that California could receive as much as $2.45 billion in taxes from Facebook over the next 3 years after the company goes public.

Watch Facebook IPO: Putting a Value on Social Media Giant on PBS. See more from PBS NewsHour.

IPOs, Investments, and Stocks, Oh My! Explaining the Business of Business

Mark Lukach — Tue, 06 Mar 2012 20:36:09 +0000

Credit: Scott Beale / Laughing Squid

Since 2004, when Mark Zuckerberg launched the first version of Facebook from his college dorm room, the company has been privately-owned. That means that only a handful of people – Zuckerberg, a bunch of his early co-workers, and a few private investment firms – owned shares (parts) in the company. This February, though, Facebook announced it was going “public,” which opens the door for outside investors to start thinking about buying into it. Facebook’s stock is expected to be available for purchase by May or June of this year.

What’s the difference between public and private companies?

All companies need start-up money (investments or loans) to get going. Private companies use private money (duh!). Some cash may come from the owners of the company, but most of it usually comes from either banks, who give loans and receive interest, or from businesses called venture capital firms that invest in new private companies and make money on their returns if the companies end up doing well (or lose that money if the company flops).

But just about anyone with some extra cash can invest in public companies. A private company may decide to go public if it needs more investment money to expand its business. When a private company decides to go public, it files for an IPO – Initial Public Offering. The company is basically divided into tiny little equal units (aka stocks) and each unit is given a monetary value based on how much the company is worth at that moment. Outside investors are then allowed to purchase various amounts of stock through the stock market. Whoever buys any portion of stock in the company becomes stock holder. That means that individual investors stand to make money if the company does well, or lose money if it doesn’t. Sounds kind of like a blackjack table, right?

What happens at the stock market?

The stock market is the place where public companies are bought and sold by investors. When a company goes public, its stock is assigned a value that depends on how well the company’s business is doing. Investors decide which companies to buy stock in and how many individual shares of stock to purchase. The smartest investors generally identify relatively new companies that have a lot of potential, but that aren’t yet worth that much money. So the stock still has a low value.

A good example of this is Google before it exploded. When the company had first gone public, the value of their stock was much lower than it is now, so those who bought into it early did well for themselves once the company starting making tons of money. In the past few years, of course, Google stock has gotten, and stayed, super expensive, so buying it isn’t necessarily as good a deal now.