Facebook Follies

The big business news last week was that Facebook is going public with an initial public offering (IPO) that is likely to place the market value of the company in the range of $100 billion. This price would put Facebook among the corporate giants in terms of market value.

By comparison, Goldman Sachs, of vampire squid fame, has a market value of $55 billion. Ford’s market value is less than $16 billion. With its current market value near $106 billion, Facebook would even give a serious run to Verizon, the giant telephone company.

While the implied value of Facebook is impressive, a question that was raised in several stories was whether the company would really be worth this much money. Some simple back of the envelope calculations show that Facebook would have to gain an enormous share of advertising expenditures over the next 5-10 years in order to generate the sort of profits needed to justify this current price.

Of course that doesn’t mean it’s impossible; Google went public with a very high market capitalization in 2004. Less than eight years later its stock price has gone up by a factor of six. Someone would want to do some serious homework before ruling out the possibility that Facebook is actually worth its current stock price.

At the same time, there have been numerous cases of companies becoming market darlings when they were most definitely not worth the price. The best example of a failed market darling is probably the Internet giant AOL, which had a peak market value of over $220 billion in 2000. The price tag for AOL today is $1.8 billion.

In the case of AOL, the founders managed to cash out before things went sour. It used its stock to buy Time-Warner, one of the largest media companies in the world. In effect, AOL got Time-Warner to sell itself for nothing, since the value of the AOL stock used in the purchase would soon be a tiny fraction of the value of Time-Warner.

The big losers in that story were the shareholders of Time-Warner, who saw a big hit to the value of their holdings. Needless to say, the executives who engineered the give-away of Time-Warner did just fine, walking away with tens of millions of dollars.

And the top executives at AOL, most notably Steve Case, its co-founder, also did fine. The deal allowed Case to walk away with billions of dollars, making him one of the country’s richest people.

Suppose that Facebook ends up looking more like AOL than Google; who would be the losers and who would be the winners? Well, the losers would be the people who jumped on the stock near its peak. If it turns out that Facebook is just an overnight sensation that is either unable to hold onto its market share or to effectively turn its massive social networking franchise into a money making outfit, then people buying its stock near its IPO price will have thrown much of their money in the garbage.

If individual investors knowingly take this risk and end up losing, that is the way markets are supposed to work. Insofar as the purchasers are institutional investors who end up losing money for pension funds, university endowments, or mutual funds in 401(k)s, it will raise serious questions as to whether the managers of these funds were doing their homework or just got caught up in investment fads, as they have so many times in the past.

On the other side we have the early Facebook employees who will walk away with millions, and of course its founder, Mark Zuckerberg, who stands to walk away with tens of billions. At a time when there is new attention being focused on inequality and the 1 percent, it is interesting to ask what Mr. Zuckerberg — who stands to rank at the very top of the 1 percent — has done for his money.

If it turns out that Facebook goes the AOL route, then Zuckerberg will effectively be the P.T. Barnum of the social media economy. He will have succeeded in creating incredible excitement and buzz that led people to voluntarily give him their money for nothing.

The result will be that many people will be somewhat poorer and Zuckerberg will be incredibly wealthy. He will be able to buy whatever he and his friends and family might want as long as he lives. He will be able to promote whatever philosophy he likes (e.g. school reform based on test scores) through charitable donations and political contributions. And, the media will treat him as a person with brilliant insights for the rest of us on how to run the country and live our lives until the day he dies.

This is a process whereby we redistribute money upward to the very rich. In this case, the key actors are highly paid money managers who don’t know anything about managing money, just as in the AOL case it was incompetent executives at Time-Warner.  In a properly working market economy these people would pay an enormous price for such disastrous incompetence, but that doesn’t describe our current economy.

Of course we can always hope that Facebook is really worth its market price.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This article originally appeared Al Jazeera.

More articles by:

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

Weekend Edition
March 16, 2018
Friday - Sunday
Michael Uhl
The Tip of the Iceberg: My Lai Fifty Years On
Bruce E. Levine
School Shootings: Who to Listen to Instead of Mainstream Shrinks
Mel Goodman
Caveat Emptor: MSNBC and CNN Use CIA Apologists for False Commentary
Paul Street
The Obama Presidency Gets Some Early High Historiography
Kathy Deacon
Me, My Parents and Red Scares Long Gone
Jeffrey St. Clair
Roaming Charges: Rexless Abandon
Andrew Levine
Good Enemies Are Hard To Find: Therefore Worry
Jim Kavanagh
What to Expect From a Trump / Kim Summit
Ron Jacobs
Trump and His Tariffs
Joshua Frank
Drenched in Crude: It’s an Oil Free For All, But That’s Not a New Thing
Gary Leupp
What If There Was No Collusion?
Matthew Stevenson
Why Vietnam Still Matters: Bernard Fall Dies on the Street Without Joy
Robert Fantina
Bad to Worse: Tillerson, Pompeo and Haspel
Brian Cloughley
Be Prepared, Iran, Because They Want to Destroy You
Richard Moser
What is Organizing?
Scott McLarty
Working Americans Need Independent Politics
Rohullah Naderi
American Gun Violence From an Afghan Perspective
Sharmini Peries - Michael Hudson
Why Trump’s Tariff Travesty Will Not Re-Industrialize the US
Ted Rall
Democrats Should Run on Impeachment
Robert Fisk
Will We Ever See Al Jazeera’s Investigation Into the Israel Lobby?
Kristine Mattis
Superunknown: Scientific Integrity Within the Academic and Media Industrial Complexes
John W. Whitehead
Say No to “Hardening” the Schools with Zero Tolerance Policies and Gun-Toting Cops
Edward Hunt
UN: US Attack On Syrian Civilians Violated International Law
Barbara Nimri Aziz
Iraq Outside History
Wilfred Burchett
Vietnam Will Win: The Long Hard Road
Victor Grossman
Germany: New Faces, Old Policies
Medea Benjamin - Nicolas J. S. Davies
The Iraq Death Toll 15 Years After the US Invasion
Binoy Kampmark
Amazon’s Initiative: Digital Assistants, Home Surveillance and Data
Chuck Collins
Business Leaders Agree: Inequality Hurts The Bottom Line
Jill Richardson
What We Talk About When We Talk About “Free Trade”
Eric Lerner – Jay Arena
A Spark to a Wider Fire: Movement Against Immigrant Detention in New Jersey
Negin Owliaei
Teachers Deserve a Raise: Here’s How to Fund It
Kollibri terre Sonnenblume
What to Do at the End of the World? Interview with Climate Crisis Activist, Kevin Hester
Kevin Proescholdt
Secretary of Interior Ryan Zinke Attacks America’s Wilderness
Franklin Lamb
Syrian War Crimes Tribunals Around the Corner
Beth Porter
Clean Energy is Calling. Will Your Phone Company Answer?
George Ochenski
Zinke on the Hot Seat Again and Again
Lance Olsen
Somebody’s Going to Extremes
Robert Koehler
Breaking the Ice
Pepe Escobar
The Myth of a Neo-Imperial China
Graham Peebles
Time for Political Change and Unity in Ethiopia
Terry Simons
10 American Myths “Refutiated”*
Thomas Knapp
Some Questions from the Edge of Immortality
Louis Proyect
The 2018 Socially Relevant Film Festival
David Yearsley
Keaton’s “The General” and the Pernicious Myths of the Heroic South