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America’s long slide into economic
eclipse continued this week with the announcement that Facebook is buying Instagram for $1 billion. What? You’ve never heard
of Instagram? It’s a photo-sharing
application for iPhones that was developed by two twenty-somethings.
The company has about a dozen employees, no revenues nor
even a business model, so it’s safe to say that Instagram
has almost zero impact on the U.S economy. Let’s hope the venture
capitalists and corporate insiders who have struck it rich with this deal
spend their money – all of which will come from the pockets of
infinitely greater fools – wisely. We only wish that Eastman Kodak had
thought of Instagram first, since all of the
patents the now-defunct Rochester company holds are unlikely to fetch
anything close to a billion dollars.
Spreading the Wealth
Meanwhile, The Boyz
on Sand Hill Road can only hope that Facebook founder Mark Zuckerberg continues to spread the wealth like so much
litter on the sidewalk. Arguably, the billion he just dropped on Instagram is likely to reap greater returns than the
hundred million dollars he donated to Newark’s school system. In any
event, the acquisition, if not the price, makes sense, since photo-sharing
has been a key attraction of Facebook. And let’s not overlook the fact
that Zuckerberg has one less would-be competitor to
worry about. Not that anyone about to reap a multibillion-dollar IPO bonanza
should be worried about anything. It is America that should be worried
as the May date approaches for Facebook’s IPO, an offering expected to
be worth as much as $100 billion. How, we should ask, can a company that
produces absolutely nothing be worth so much? Chalk it up to the madness of
crowds. Beyond the rhetorical question, however, there is an economic one:
With its reported 850 million subscribers, how much is Facebook actually
worth?
In the 1950s and 60s, the same question
was often asked of U.S. companies contemplating doing business in China. Sell
just one bottle of Coca Cola to every Chinese man, woman and child, the
thinking went, and a company could hit the jackpot. Who knew that the Chinese
would ultimately forge licensing agreements with the likes of Coke that
ensured that most of the profits stayed in China?
Biggest Challenge
In trying to monetize 850 million pairs
of eyeballs, Facebook will face a different kind of challenge – one
perhaps even more daunting than hard-nosed deal-makers on the other side of
the negotating table. Since most of their revenues
will necessarily come from advertising – another business, by the way,
that adds nothing of substance to the U.S. economy — Facebook can grow
its relatively paltry bottom line only by getting in subscribers’ faces
more and more aggressively. That’s not going to sit well with the
desk-potato set – does not sit well with quite a few of them already.
For in fact, subscribers’ personal data is being used in ways that
would appall them if only they knew. Let me illustrate. On a recent morning, a
thumbnail picture of three bikini-clad hotties (see
above) appeared on my own Facebook page under the tagline, “Supermodels
without photoshop (sic)”. It is unclear
whether the Facebook friend who put it there even knew he was doing so; just
as it is unclear, whenever we click on ANY item on ANY Facebook page these
days, whether we are abetting the creation of a daisy chain of personal
information of the sort that gives ad-men and marketing gurus
wet dreams.
As for the three hotties,
when I clicked on the picture to get a better look, a Yahoo! message appeared
warning that an “app” would be downloaded onto my hard drive to
collect my “basic info” (??), my e-mail address, birth date and
Facebook “likes.” This might seem innocuous, especially to the
teeny boppers who comprise Facebook’s core demographic. But the uses to
which such data could be put, in conjunction with other data collected on us
whenever we browse or click, boggles the imagination. We already described
here how retailers have learned to “triangulate” discount-coupon
data so that they can “detect” when a female shopper is in her
first trimester of pregnancy. Pretty clever, right? This feat pales in
comparison to what they’ll be able to do when Facebook et al. have had
a few years to compile reams of data on individual users.
A Legal Firestorm Awaits
Our prediction for Facebook as in
investment is that shareholders had better prepare for a firestorm of privacy
suits. Although it seems unlikely that plaintiffs will lose any of these
battles, heaven help us if they lose the war, since an unchecked Facebook
would surely come to know each of us far better than most subscribers –
even the young and ignorant – would care to be known. Legal issues
aside, it will become increasingly obvious – and offensive — to
subscribers that they are being scientifically packaged and sold to marketers
in insidious ways. It is predictable that a Facebook privacy scandal will
shake the company to its core, causing customers to revolt and the stock to
drop precipitously. You read it here first.
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