Facebook IPO

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Today we witnessed one of the most incredible Initial Public Offerings (IPO), as Facebook went public. Analysts had estimated that after going public, the company's valuation may reach $100 billion. They were close. It's valuation was $104.2 billion.

The usage of this social media giant is staggering - with more than half a billion users worldwide, and that number continues to grow exponentially. There is no question that the company has enjoyed enormous success, but as a former investment banker, I must remind you that true investors don't care about what you did yesterday, but "what will you do for me tomorrow?" There are some significant challenges that lay ahead for the company. Serious questions have been raised about the effectiveness of marketing through social media Web sites. Only this week, General Motors (GM) announced that they were dropping Facebook as a conduit for their advertising campaign. 

GM, the third largest US advertiser, felt that Facebook garnered only half the user clicks that Google could accomplish. Nevertheless, a more daunting test awaits the company in the short term in the guise of new European Union (EU) privacy legislation. The Data Protection Directive (Directive 95/46/EC) is being overhauled as the EU Parliament seeks to introduce new draconian online privacy legislation. This legislation is largely the antithesis of what exists for online companies in the US.

Under the new legislation, which could be introduced as early as 2013, consumers will not be opted-in by default to having their information shared with third-parties, and companies like Facebook will be required to seek permission from the user before sharing personal information. Furthermore, consumers will have the right to request that their information be permanently removed from an online company's databases.

What is particularly surprising about the legislation is that a consumer may request that their personal information be transmitted to another service provider. In essence, this means that Facebook must facilitate the transmission of their personal information, can then force Facebook to delete their records on their system, and move on to the next big social media site with very little effort from the customer. Privacy by default will inevitably have a serious impact on advertising revenues for Facebook, which received around 85% of their $3.71 billion in revenue last year from advertising. 

There are approximately 500 million citizens of the EU. An EU mandate has already been issued to online companies to provide a new standard for using cookies; consumers must be allowed to opt-out of their information being shared with third parties. Online companies have been warned that failure to comply will result in significant fines, and an inability to provide a solution will result in a new standard being imposed on them later this year. The Obama Administration has also made it clear of its intentions to abate online privacy concerns by hoping to introduce new legislation and imposing fines on companies who have tried to circumvent existing laws. They have acted vigorously through the Federal Trade Commission (FTC). 

Google has been in the headlines numerous times as a result of FTC probes, but Facebook has also settled with the FTC relating to privacy improprieties. We should acknowledge the success of Facebook and its creator Mark Zuckerberg. It is difficult to comprehend that this type of technical innovation could occur anywhere but here in the United States. It is this type of ingenuity that will continue to help America remain competitive. Although I ask that investors do their due diligence, it is indeed a great day for our country.

[Editor's note: According to news reports, Facebook's $16 billion IPO has made Zuckerberg the 29th richest person in the world, surpassing Google's co-founders.]

Darren Hayes is a professor at Pace University's Seidenberg School of Computer Science and Information Systems in New York and chair of Pace's Computer Information Systems Program who began a 10-year career in the financial services industry in 1990 as a stock analyst with Cantor Fitzgerald at the World Trade Center. 

Posted on May 18, 2012 01:16 pm | Permalink 

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