Facebook, IPO and valuing a company

This week we’ve been hearing about the debacle that was the Facebook IPO.Which has revealed that some of the underwriters for the IPO were doing shady things. Matt Taibbi believes that this indicates that there are essentially two markets. One for the insiders and one for the schumcks, the every day investors.

Why is this important? Well, based on the discussions I’ve read online, there’s a lot of concern of the validity of the whole IPO process, the valuation methods of companies and how investors think of companies. The valuation of Facebook had a great deal of discussion before the final IPO price of $38/share, this was partially driven by two articles that came out. In the first one it was mentioned that GM was pulling it’s account because “Facebook ads don’t work.” The other article of note relates that researchers found that 44% of Facebook users will NEVER click an ad. This research is important because some of the valuation is based on the conversion rates of ad views to ad clicks. On average Facebook was only able to earn around $4.34 per user. The valuation of $100 billion puts the life time earning potential per user at $100 (at 1 billion users). This is pretty low, but at the same time, if only 560 million users ever click ad, that pushes means the people that do click ads need to be earning Facebook roughly $200.

MIT Technology Review discusses how this is an unsustainable growth model for Facebook. Essentially, Facebook will begin to drive down the cost per view for their advertisers to try to increase their total revenue. This falls into the race to the bottom mentality that crushes industries. Advertisers will be able to say to any website, why should we pay you x amount per ad when we only pay Facebook y there is no way that you can get me more views than Facebook. The only way that a site could get more revenue if they can show data for a higher click through and conversion rates than Facebook. That might be tough. The Review article argues that this will eventually kill Facebook and a lot of the ad driven website business models.

The other aspect of the IPO is a difference in the way that business and technology media are reporting on Facebook. Things have shifted from all the non-business related activities to focusing solely on this aspect of Facebook. This will likely shift over time, but I believe that these considerations will be discussed in any article related to Facebook. If Facebook wants to remain a haven for activists it will be difficult if there are potential suits over people being activists. There will be an increase of risk aversion within the “owners” of the company as there will be influence from investors.

Zuckerberg has said that he plans on doing what is best for the long term and try to ignore the demands of investors. He might be able to do that because he still owns 57% of the voting rights for the company. However, it will be difficult for him to avoid the influence of the discourse of media outlets. Even if he gets all his news from his friends on Facebook, there will likely be articles posted that will give him news about the company and things that he probably won’t want to read.

Essentially, discussions will shift from being about the risk of privacy for users to how changes to Facebook will impact investors bottom line. I don’t think this is healthy for businesses, consumers of Facebook or the general public. There are other things companies do that are unrelated to investors that are important for society as a whole. The Facebook coverage really indicates that we don’t look at businesses in a long term sustainable manner. We need to change this if we want to save capitalism.

A bit remiss

Sorry dear readrs, I’ve been very bad about writing any blogs lately. I’ve had some pretty big changes in the past two months as you all know. I’ve moved back from the Netherlands to the US, did some consulting work and I just started a job at AMD. Consequently, I’ve not been able to post as much as I have in the past. Big changes have been happening in my life.

Because of these changes I wasn’t able to pay enough attention to the CISPA fiasco that just occurred in the US. This law is a terrible step in the direction of data tyranny. I’m even being hyperbolic about this either. I wrote about the risks of having a voluntary data sharing program and in my review of Consent of the Networked I discussed the different data and Government regimes out in the “wild.” These concerns are valid. We need to be aware of what’s going on. Now, I have to say we pretty much blew our collective internet protest load with the SOPA/PIPA protests. Which is actually a problem. I would hazard that in many ways CISPA is as bad or worse than SOPA, however I didn’t see as much chatter about CISPA on reddit, twitter, Google+ or Facebook about CISPA as I did about SOPA.

I think there are a few reasons for this actually. First, the majority of the people were able to clearly understand the risks associated with SOPA. These risks are pretty straight forward and understandable. These risks affect us tomorrow not in some future time period. In many ways SOPA like acts can already happen today. This makes it extremely obvious why SOPA/PIPA are terrible laws and should be opposed at many levels. Second, with CISPA coming so quickly after the SOPA/PIPA protests there was likely something of a protest overload or disbelief that another law could come through so quickly that is as bad or worse than SOPA. Especially with the language that was being used at the time of SOPA. It would have broken the Internet, how could anything be worse than that? Third, there was more support by large companies for this law than for SOPA. Apparently that actually matters more than we realized. We were able to push Wikipedia, Facebook, and other large companies to protest this law. However in this case Facebook and Microsoft supported the law while Google sat on the sideline saying nothing about the law.

I think from this stand point, people that weren’t happy with CISPA but didn’t understand the importance likely didn’t do anything about it. However, whenever a fantastic website like Wikipedia blacks out in protest for a law it will get people who are only on the fence about the law to actually do something about the law.

CISPA and SOPA are both bad but in very different ways. CISPA is something of an abstraction of risk. Losing your privacy when so many people already voluntarily give up so much information about themselves on Facebook and Twitter might not seem like as big of a deal. The secondary abstraction is a lack of understanding of the impact of the data sharing. It’s unclear of what exactly the Feds would do with the data once they have it. It’s unclear how data sharing would occur within the government. However, it is likely that the data would be shared throughout the government including the military. Which many privacy experts are say essentially legalizes military spying on US civilians. The third problem is that many people also feel that if you aren’t doing something wrong you don’t have anything to worry about. However, this is a fallacy as even people who are doing things that aren’t wrong can get in trouble. I’ve discussed the cases where people are fired for posting drunken pictures on Facebook. Additionally, this type of law represents the biggest of the big government that we can imagine. There’s no reason why the government needs to know what we’re doing in this level of detail.

It’s going to be a long and difficult fight to keep our internet free. However, it’s something that we must do and I believe we can do it. We will just need to keep vigilant and work together to ensure that our internet stays our internet.

Free-market, Small Government and Regulations

The free-market has been used to argue against regulations and for small government for years. However, I believe that the major supporters of using the free-market argument are disingenuous in their application of the argument. In addition, the free-market is a flawed theory which needs to be revisited by neoclassical scholars and adjusted.

The free-market theory comes from the idea that there is an invisible hand that guides the market towards equilibrium between supply and demand. This assumes that once the equilibrium is hit it will stay at that point until there is some shock to the system which would find a new equilibrium. Each time that there is a shock, the invisible hand would push the market into a new equilibrium. This idea came as a side comment in the Wealth of Nations. This idea has become enshrined in the minds of neoclassical economics in a manner that Newtonian Physics was presumed to be accurate. In both cases the theory is incorrect. Relativistic Physics has replaced Newtonian, but in Economics the free-market is still the prevailing mechanism for policy creation. There has been no evidence for an invisible hand at all. In fact Metcalf created the theory of a networked economy which argues that the value of a good becomes more valuable as more people use it. I’ve mentioned this in the past. Essentially, this will prevent any equilibrium from every being found as the price can increase and people will still adopt the networked item because it’s becoming more valuable to the user. Or the price can remain constant even when it should drop for other factors such as a reduction in cost of production. A perfect example is the iPhone. According to research Apple has a whopping 72% margins on the iPhone, even if production was moved to the US Apple would still make 42% margin on the iPhone. There also is an over production of the iPhone and strong competition, which would indicate that the iPhone should drop prices as they are capable with that large of a margin. This market has a great deal of competition and has a large number of companies producing, which indicates that it Apple should be under pressure to drop prices. However this isn’t happening because of the networked value of the iPhone. There are a huge number of apps for the phone, the apps are high quality and the product works well with other iPhones. The market has had no impact on the cost of the iPhone.

However, free-market champions would look at any effort to change the labor practices of Apple as wrong headed and regulation that isn’t required. The Market isn’t demanding any change to labor practices because the market can bear the current prices and the demand indicates that people don’t care about labor practices. However, it’s well known that there are no alternatives to Apple’s iPhone that are produced in an ethical manner. So voting with your money wouldn’t actually work here. The problem arises because there is something of a monopoly in the manufacturing of the smart phones in FoxConn. In this case there is a market failure. Which is something that neoclassical theorists argue cannot occur. The market cannot send a signal to firms because there is no mechanism in which the market could send a signal. This is can be understood if you view this industry as a networked economy. Where you see the ties between manufacturers and handset companies, which would show a massive connection to FoxConn.

Efforts to regulate the manufacturing of devices have been argued as the reason for moving the manufacturing to other countries. However, this is not the case in the case of Apple, as they would still have huge margins. It’s because the company is attempting to maximize profits, not reduce costs to be profitable. The same arguments have been used to argue for smaller government. Saying that since there are no market failures the government should not intervene in the industry.

The unfortunate thing is that these arguments immediately disappear when it comes to protecting the profits of record industries. The same free-market advocates then move to argue that intellectual property must be protected. Essentially, creating protection for a specific product through IP causes a market failure and prevents the market from operating at its most efficient because there are not other competitors in the market. Creating IP requires a huge regulatory framework from the mechanisms of registering, logging complaints and prosecuting actors that infringe on the IP.

This type of industrial policy is typically derided by the small government fans, as it is a type of regulation that selects a “winner” (IP owners) over “losers” (non IP owners). Which may be fine. However, whenever this selection pushes our government to select a winner (Music) over the fastest growing, possibly only growing, part of our economy (internet based companies) there is a serious risk to the future. As I’ve mentioned before these laws represent huge risks for innovation.

These laws are SOPA and PIPA, which I’ve discussed extensively. However, the next round of internet regulations come in the form of CISPA. This bill, which requires allows companies to share extensively with government agencies. This type of sharing of user data and information about the activities going on at the company would not go over very well from the the free-market advocates if this was a request for data about customer data for car dealerships or steel mills. Essentially, this is going to increase the cost of doing business in the US. This may prevent companies from working in the US and prevent innovation. If I was to create a company that dealt with social data I would not want to do so after the passing of this bill. It would be likely that I would be blackmailed into giving the government data about my users that I had no desire to give them.

The internet is the perfect example of a networked economy. Facebook’s value comes from the fact that it has a huge user base. This is true for Google, Amazon and Instagram (List of companies that support CISPA). Without the users the services is literally worthless. With the users a company without any revenues can be worth $1 Billion (Instagram). The difference between this bill and other bills like SOPA and PIPA is that the agreement is bidirectional. The government will likely help Facebook and Google fight Chinese attacks and give information to each other about the activities of online hacktivist groups like Anonymous. It is likely that 4chan will end up giving over IP data and other information related to anonymous and Anonymous users.

This is regulation that the internet doesn’t need and will stifle innovation. The government already has these powers, which maybe why the Obama administration is opposed to CISPA. It is also ironic that Obama plans on sanctioning countries that use Tech to abuse human rights specifically committing genocide. A whistle blower has recently announced that the NSA has intercepted 20 TRILLION emails and likely has copies of all of these stored somewhere. The passing of CISPA and any other law of similar persuasion  would likely protect companies like AT&T from future lawsuits for being complicit with these activities.

For devotes of the Free-Market these laws create market distortions and will cause serious harm to innovation on the internet. For people that understand networked economies, this will greatly undermine the value of these networks as users will likely change their behavior to mitigate the amount of information the Government can compile on them. CISPA and its sister laws SOPA and PIPA represent big government actions attempting to control and regulate industries that do not need to be regulated. In this case there is no market failure that needs to be addressed. Privacy is something that the users have been pushing for and Facebook and Google have steadily improved on those accounts. Surprisingly industry is doing a decent job at regulating itself. Finally, regulations being pushed by advocates of small government and free-market smack of hypocrisy and a lack of understanding. These laws require a deep understanding of the internet and how the market of the internet works. Without this understanding terrible laws will be passed that will damage our privacy and freedoms. For the issues that this law would protect from there are other methods that could be employed to gain the desired results without passing laws.

Contact your congressional members to fight against this bill.

CISPA and the problem with volunteering data

So, CISPA, Cyber Information Sharing and Protection Act, is the newest cyber bill on the block. There is a difference between this and the other laws though. In SOPA and PIPA the laws were mandatory, and the government could simply act. In CISPA companies can willingly filter material and this may be based upon information the government provides as a threat. This was a bad situation and internet companies seem to like this law. Facebook and Microsoft are straight up supporting the law. There is uncertainty in the public if Google is or not.

So, in this law the government and internet companies can voluntarily share information about cyber threats and suspicious activities online. However, the problem with voluntary sharing programs is that they can turn into “voluntary” programs. What do I mean? Well, if the government is not required to give the information to all parties that could be affected in some sort of terrorist act the government could decide to give information to companies that are sharing information with the government. Additionally, the government could punish companies, like Twitter, that fight the government over privacy issues by not sharing information.

These are pretty obvious problems with this type of law. It assumes that each event is independent and previous actions have no consequent. This is a faulty premise. If this is viewed as a multi-turn prisoner’s dilemma, it’s obvious that with repeat interactions the best actions will always be to share. This will likely lead to sharing when there are cases of doubt over if the company should share or not. Companies will fault on the side of security over privacy, because the future benefits outweigh any punishment the users can enact on the companies.

These types of pseudo quid pro quo is impacting the US government in other ways including lobbying. It is likely that this information exchange will be used by companies whenever there are negotiations for future laws. They will be able to say, “you need to respect our rights to X, look how friendly we’ve been with the government” and then show a list of times they voluntarily gave data to the government. This was a tactic that Ma Bell used to keep their monopoly as long as they did. Because the company was providing the government with extra public goods (military research), the government was willing to over look the fact that the company was a monopoly and perhaps should be broken up.

CISPA is a dangerous law that we need to carefully weigh accepting. We need to pressure internet companies to step away from the law. We also need, if it passes, better understanding of when companies hand over data willingly and for what reasons. We should also be notified any time a company hands over our data about us to the government for any reason.

Social network patent war?

Today the first salvo has been launched in what will likely be a brutal and bloody patent war in the social networking world. Yahoo! has decided to go after Facebook with several patents which were bought from Friendster a now long defunct social networking site. As I’ve mentioned in previous posts companies that start suing over patents likely have lost their competitive edge. However, I think this is going to have long reaching impacts.

Facebook will likely try to find something they can use to counter-sue Yahoo! Which I believe will open a huge can of worms. A large number of companies have put forth effort into creating social networks and there are companies that are built on top of those networks. Essentially, this is an entire ecosystems of companies and products that interconnect and work together. Until now, it has been rather peaceful except for a few angry words tossed back and forth.

I’m not really aware of what patents are out there for these types of sites, however, it is likely that all the major companies are going to be scrambling for patents. Some of the companies involved have already been in patents wars, Google for example. I don’t think Google is going to sit by and allow other companies to attack them the way that Apple has gone after Android. This would be an extremely foolish business move so, I think it makes sense for Google to actively defend (attack) competing firms by acquiring patents and aggressively targeting firms that may be infringing.

Apple has also tried to get into the social networking side of things with their Ping network. Based on their previous patenting strategies, it seems likely that they have built their own war chest of patents and we know how Apple likes to use them.

Yes, much of this is simply speculation. However, as the entire ecosystem of social media and networks have developed into a huge new area of business and marketing, we need to be aware of how these could impact us. Systems that allow access to multiple different social media accounts could be shut down using patents to enforce the use of each platform. I use tweetdeck and I know other people that use Hootsuite they essentially work in the same way (results may vary), but could a patent derail their use? I don’t know at this point, but i’m not happy about the prospect. I’ve mentioned before my distrust of Facebook, which is why I use tweet deck and sign in using Incognito. An all-out patent war could seriously disrupt this growing environment and reshape the way we use these networks.

Crowd Source Legislation

Crowd sourcing, is a name for a group of people taking part in something from all over the place. One of the first initiatives like this is open source software, a more recent version is Crowd source funding for businesses. These started as initiatives to give micro loans in Africa and other developing countries. More recently, websites like Kickstarter have allowed everyday people to help get new ventures starting (I plan on writing more about this later).

So what’s the deal with the legislation? Well, essentially, this is building upon the momentum Reddit and other websites generated during the SOPA/PIPA protests. Members have decided to create something like an internet bill of rights. The idea is the create a better balance between content holders, private companies, governments and users. In China there’s a great deal of censorship and Google and Twitter have both announced censorship based on the location of the user. This type of censorship would have killed the Arab spring before it happened.

OK? but that’s not going to effect me in the US. Well, we don’t know that. Yes, we have provisions against free speech, but that’s against governments censoring speech. It’s difficult to know what a private company will censor when this speech is in a quasipublic/private space. Facebook routinely censors groups and speech on their site. Additionally, look at what’s happening with MegaUpload.com and their users. There was legitimate use on the website and the Department of Justice doesn’t care. The EFF and the hosting company are working to find the legitimate data held on the site.

One of the goals of the act would be to reduce the ability of sites to censor speech. It’s clear that this is an important goal of the act. Additionally, there are programs, like TOR, that have been developed to allow people behind censorship to circumvent it (See my post about how TOR works). However, there could be penalties for people that use TOR in the US to help people circumvent the censorship. These types of ideas are what the goal of FIA is.

If you’re interested in taking your anger at SOPA/PIPA into a new direction and potentially become more involved in our government check it out here: http://www.reddit.com/r/fia/

But that’s US based stuff. Yes, sure it is. It seems like most of the users interested are from the US. Many of the users involved would like to see this become a treaty instead of just a law. In that case involvement from many different countries would be ideal and requested. Additionally, there is no reason why this type of legislation should be restricted to the US. These ideas are universal.

Data protection, anonymity and copyright

I talk a great deal on this blog about data issues, privacy and ownership, anonymity and copyright, however is there a clear connection between them? Should we care about who has access to our data, who we are and control over our access to data?

I think that these issues are so connected that we need to do something about how they are managed at a federal level. Currently, it’s rather easy for governments to request data from internet sites. Some times they require warrants or court orders other times the companies simply hand over the data. Savvy users understand how their data is collected and used by companies. I’ll be the first to admit that I’m learning about this as I’m going. It’s not easy because some times it’s really inconvenient to really protect your data. The more sites that are connected together the more likely one of your accounts are to be hacked. Linking sites also creates other problems. Specifically Facebook and Google. Twitter isn’t as bad, but it easily could be.

Why are Facebook and Google bad though? First Facebook is the worst by far. Both Zuckerbergs have made statements proclaiming privacy a bad thing.We can see this erosion with the creation of Facebook’s OpenGraph and seamless information sharing. We’ve all see the increase in the amount of information that our friends are sharing. Such as Spotify and articles they’ve read. Which now no longer click through, but end up going to some app from that company. All of this information is being stored and sold to customers with your name on it. Effectively you’ve lost your ability to view websites freely without it being stored on multiple servers by multiple companies at the same time.
Google comes in a close second with their privacy problems. They aren’t any better with Google+ as they require names at this time. We also don’t know what Google does with the information that you give them when you link accounts together. By giving access to Google when you sign into another website Google is learning more about you which will likely be used to adjust your filter bubble.

Without anonymity or at least pseudonymity it’s significantly more difficult to control access to your data. Putting a buffer between you and the people that are interested in learning about you as a person can protect you from a lot of bad people. However, whenever there are discussions about anonymity or pseudonyms some one almost always makes the argument that it will increase the safety for child molesters or terrorists.

The Copyright industry is one of the most vocal advocates of this tactic. In fact, this is one of the arguments being used for SOPA. They argue that if you don’t have anything to hide then you have nothing to worry about. Well, I don’t buy that argument. People have privacy fences for a reason around their yard. Why not do the same thing for your data? Being anonymous doesn’t mean your bad, it just means your being safe.

Anonymity makes it more difficult for copyright holders to come after people who download movies without buying the movie. They want to know if your downloading it regardless of the fact that you might actually own the movie in some other physical medium and are using the digital copy as a back up. They also don’t really care if you go out and buy the movie after watching it. In fact the Swiss government came out and said that buying a movie or song after downloading is extremely common.

Based on these three points, I believe that everyone should be pushing leaders to increase the ability for users to be anonymous on the internet. This will protect users data from identity theft, allow users better control over their data and decrease the impact of the filter bubble. We must accept the fact that people may use the freedom in unethical ways. However, this doesn’t mean that it’s unethical for people to be anonymous online and doesn’t mean that they are unethical. It means that we need to define clear laws and procedures to deal with unethical or illegal activities in these systems. Without these guidelines we are likely to have no control over our data.