JUDY WOODRUFF: Next: putting a value on the social media giant Facebook.
Jeffrey Brown has our story.
JEFFREY BROWN: From its founding in 2004, that recently, Facebook has grown into a worldwide phenomenon, now with more than 800 million users.
It’s the place to gather online friends, share your photos, likes and dislikes. It’s been seen as a potent tool for democratic change and slammed for making too much of our private lives public.
Now what started as a small social hangout conceived in a Harvard dorm could become one of the largest public offerings of a company in history. Today, Facebook filed papers with the Securities and Exchange Commission to raise some $5 billion and take the company public.
To walk us through all that, we turn to Nate Elliott, principal analyst for interactive marketing at Forrester Research. He joins us from the Nasdaq market site studios in New York. And Steven Levy is a senior writer at Wired magazine.
Steven, I will start with you. Today’s filing finally offers a kind of window inside Facebook’s business. I know it just came out. You have got just a quick look, but what jumps out at you right away?
STEVEN LEVY, Wired: Well, a couple of things.
The revenues were pretty much in line with what people were thinking. They had somewhere south of $400 million of annual revenues and a profit of $1 billion, which is pretty nice. One thing is that all the money they have is in advertising, except for about 15 percent, and almost all of that is they have a payment system which is dependent on one company, the game company Zynga. And that was kind of interesting there.
The other thing that struck me was the very striking letter from Mark Zuckerberg, the letter to potential investors, where he talked about how the company’s mission is more important than making money to him. The money comes — enabled him of fulfill the mission of putting the world in contact with each other, and doing it by the hacker way, as he describes it. That was pretty interesting.
JEFFREY BROWN: I want to come back to that letter in a moment.
But, first, Nate Elliott, fill in a little bit more of the business model, the advertising. How does Facebook make its money? You look at a moment like this, when everybody is trying to figure out how much it’s worth. How does it, to use that ugly word, monetize all this information that it gathers?
NATE ELLIOTT, Forrester Research: Yeah.
Well, what they’re doing right now is selling advertisements against the people who visit their website. So, it’s what I would call a nice little business. It’s a pretty basic revenue model. But they’re selling ad badges to advertisers. And the good news for Facebook is they have got 800-plus million people who come to their site every month, 400 million-plus per day.
And so even a nice little business like that across 800 million people turns into several billion dollars in revenues.
JEFFREY BROWN: You say it’s a nice little business. So, what — is there a plan that jumps out now as a way to make it into an even bigger business as a public company?
NATE ELLIOTT: Yeah, I think there are two steps there.
And the first one, Facebook clearly sees, and the second one, we have to hope that they see. The first one — and they talk about this in the filing today — is that they know they need to make the ad platform on their own website better. They need to provide more value to the marketers who are spending money on Facebook.com right now.
But, again, that’s a revenue model that’s been around for a while, selling ads on your own website. And what Facebook needs to do to really transform its business and to become the company it wants to be is find other and better ways to use its data and to transform advertising elsewhere online, to power ad targeting and make advertising more effective, not just on its own website, but on lots of other online properties.
JEFFREY BROWN: Well, Steven Levy, what would you add to that, about how it uses the money that it now raises, that $5 billion? And does that inevitably sort of butt up against a lot of the questions that people have asked about it from the beginning, how it uses information that many people, 800 million people, give it for free?
STEVEN LEVY: That’s right.
It really hasn’t cracked the problem that Google cracked in its early days, which was a novel way to make money which was really in sync with what the users wanted there. Facebook is unique in that it could really micro-target advertisers — or customers for advertisers.
If you are living in Memphis, Tenn., and you just got engaged, Facebook knows that, and can sell an ad to the bridal shop in Memphis. And, you know, they also could sell to a broad audience of the 800 million people there.
But what they haven’t done is done it in a way where users hunger to see those ads and want to see them. And the one time it tried to go outside of Facebook to the Web for the advertising was when it had a program called Beacon, and that didn’t work out too well. So they still have a ways to go there, particularly in the mobile space, which they note in the IPO.
JEFFREY BROWN: Now, Nate Elliott, set up a little bit more of the context here. I know the filing mentions a lot of the potential risks to the company going forward.
It says, for example, that they’re fighting off a challenge from Google, which the world watches. It talks about problems in China. It talks about being hounded still by privacy concerns. What — spell that out a little bit more for us. What kind of risk do they face?
NATE ELLIOTT: Yes. Well, I don’t know if they have problems in China, because they’re not in China.
JEFFREY BROWN: Yes, that’s what I meant.
NATE ELLIOTT: The problem is, they need to figure out whether they want to be there and find out if there’s sort of a halfway solution, where they can operate out of Hong Kong, perhaps, in the way that Google has been doing for the past couple of years.
When you look at their user growth, it’s slowed down quite a lot. They announced 800 million users many months ago, and they’re only at 800 million and change right now. The good news for them is the users are becoming more and more active.
And daily user growth is outgrowing or outperforming monthly user growth. So they’re doing a great job of getting the users who are on the site more actively engaged and coming back more often. But if they want to keep the overall user numbers going up, they need emerging markets.
And they note in the filing that a lot of the growth is coming from markets like India and Brazil. China is the untapped market for them. And we already see millions of people in China using Facebook, even though it’s illegal to do so.
And we know if they flip the switch, that there will be many, many millions of people in China who want to use Facebook. So they need to make a decision. Are they willing to play by the Chinese government’s rules in order to take advantage of potentially hundreds of millions of new users in that market?
JEFFREY BROWN: Now, Steven Levy, come back to that letter from Mark Zuckerberg, and a lot of language that I saw about the mission. It says it wasn’t originally built as a company, but — quote — “built to accomplish a social mission, to make the world more open and connected.”
We saw this with Google with its famous model, do no evil. Is there a point where these companies, the idealism, original idealism kind of runs up against, well, the demands of the marketplace and shareholders?
STEVEN LEVY: Right.
Well, that’s a definite danger of any company as it get bigger there. And do I think that — before we jump to the cynical side and point fingers at Zuckerberg and Facebook, we are on the cusp of something different here. This social networking — and Facebook is the flagship of that — has changed our world.
And that’s really where it’s positioning itself — and Zuckerberg is very explicit about this — in the center, of changing the way we communicate with each other, changing the way we communicate with our governments — he says that in the IPO — and doing it in this idealistic, hackerish way, and hacker not in the break-in sense, but in the best sense, like I wrote in a book 27 years ago.
And I think that there’s something to that, that it has changed it. And before we start pointing fingers and saying, oh, my God, you’ve turned your back on that, you’re violating our privacy, it is something that could be of benefit to people there.
So I think, on their IPO, at least, we shouldn’t stomp on them.
JEFFREY BROWN: All right. We’ll watch what happens. This takes place over the next few months.
Steven Levy, Nate Elliott, thanks so much.
NATE ELLIOTT: Thank you.
STEVEN LEVY: Thank you.