Floating Facebook The IPO of Facebook—both (1)______and risks I. IPO brings money A. Mr. Zuckerberg, who owns 28.4% of Facebook,

Floating Facebook
    Hello everyone, welcome to the business course. Today we will focus on a social network site that changed the world. Yes, you’re right, that’s Facebook. Facebook is going to make its IPO. It is likely to become a gargantuan company. (1) That will bring risks as well as rewards. Facebook will soon make a fortune for its founder Mr. Zuckerberg, still only 27, who owns 28.4% of Facebook and will continue to control most of the voting rights. It will also enrich other shareholders, many of them employees. On February 1 st the company announced plans for an initial public offering (IPO) that will raise $5 billion, maybe more, in the largest flotation ever of an internet company. Not since Google’s IPO in 2004 have techies and venture capitalists been so aflutter. Facebook’s flotation, which is likely to take place in the spring, will create a publicly quoted tech giant that will stand alongside American technology titans such as Amazon, Apple and Google itself.
    Facebook’s stunning progress has earned the company estimated valuations of between $75 billion and ＄ 100 billion. The case for thinking such a valuation is justified rests in part on a couple of broad technological trends that show no signs of going into reverse. (2) The first is the rapid spread of internet connectivity, which is making Facebook accessible to ever more people. The second is the rise of the mobile phone. Already more than 425 million people are tapping into Facebook on these devices and in future most of the social network’s growth will come from the mobile web. Together, these trends could propel the number of users beyond 1 billion.
    Admittedly, other social networks will be helped by this too. But Facebook stands to benefit the most because Mr. Zuckerberg and his colleagues have cleverly positioned the site as a "social utility" , as he once put it, which lets people do all kinds of things, from passing on newspaper articles to playing games or posting photos of themselves, their friends or their pets. (3) They can do more and more, because Facebook has enticed outside developers to create software "apps" that run on its platform and has itself constantly improved the platform.
    All this explains why people are now spending far more time on Facebook than on rival web services such as Google and why it has benefited from strong network effects. It is spreading fast across emerging markets such as India and Brazil, where it recently dethroned Google’s Orkut as the leading social network. One reason why Facebook was able to topple Orkut is that people began to join it in droves to keep in touch with friends abroad who were already on the network.
    The network is working overtime to harvest even more data from Facebookers which it can use to aim ads at them. Last September, it unveiled a new set of social apps that allow people to do things like watching films, listening to music and reading news on Facebook rather than going elsewhere on the web to do so.
    Facebook could also make more money by creating an advertising network that takes advantage of the already extensive reach of its tentacles across the internet. Millions of websites are integrated with it through various software it has developed, including "social plug-ins" that allow people to share their activities and interests elsewhere on the web with their Face-book friends. This has made it an important source of traffic to other websites and it could offer to help them sell ads, pocketing a percentage of the money raised. Some analysts think this could bring in as much revenue as ad sales on Facebook’s own site.
    There is also a strong possibility that the company will attack the online-search business, which accounts for almost half of online ad revenue in America, according to the Interactive Advertising Bureau, an industry body. After all, the social network already knows a lot about how people’s recommendations affect their friends’ choices.
    As more people use Facebook from mobile phones, the company will also be able to sell ads that appear on these devices. The difficult bit will be to find formats that are not too intrusive on a small screen. Facebook could well end up using "sponsored stories" , which allows, for instance, a music publisher to pay for a link to its website to be embedded in posts that mention its artists.
    But it will be harder to build an advertising business based on a social network than one based on search, like Google’s. Google’s ads are effective because they are presented when people are looking for something specific. Facebook’s may be less effective, because people go to the site when they want to socialise, not search for stuff or buy things.
    Moreover, although some brands, such as Starbucks, have managed to draw huge, engaged audiences on Facebook, others have had a frustrating experience. The chances are that Mr. Zuckerberg will use at least some of the money the firm raises from its IPO to buy ad-measurement firms and social-media consulting outfits to help its corporate customers get more out of the network.
    The transition from edgy start-up to established giant will not be easy. And there are other risks too.
    One is that people stop using Facebook, either because they lose interest or because they are put off by its behaviour. As News Corporation discovered to its cost after it splashed out $580 million on Myspace in 2005, network effects can also go quickly into reverse. Once large numbers of people started leaving the service, which became more cluttered than a teenager’s bedroom, it proved hard to stem the tide. Last year, News Corp sold the business for just $35 million.
    Facebook has also had occasional brushes with privacy watchdogs. Last year Facebook incurred the wrath of America’s Federal Trade Commission (FTC). The commission had been inundated with complaints that the company was making public data about its users that it had said would be kept private. As part of a settlement with the FTC, Facebook agreed to submit to an external audit of its privacy policies and practices every two years for the next 20 years.
    The bigger risk to Facebook is that growing concern over online privacy translates into a wave of legislation around the world that makes it far harder for the company to exploit the mountains of data it is collecting. That would throw a spanner into the works of its money-spinning advertising machine. So far there has been little sign of such a backlash, though governments are paying closer attention to privacy. America is thinking of creating a general consumer-privacy law and the European Union is updating its rules.
    The social network’s IPO will also set the stage for an epic battle among the titans of the tech industry. It has been clear for some time that Google is squarely in Facebook’s sights—and that Facebook is in Google’s. But as Facebook builds its social-app platform and takes it onto mobile devices, it will pose more of a competitive threat to Apple and Amazon too. Perhaps Facebook will be tempted to use some of the cash from its IPO to strike a partnership with a hardware company to produce a "Facebook phone" with a Facebook-created social operating system.
    Such a device would be entirely in keeping with Mr. Zuckerberg’s belief that things should be "social by design".
    Preserving this spirit will be vital if Facebook is to present its new investors with the graph that they will most want to see: one that shows a steadily rising share price. That’s all for today’s lecture. See you tomorrow.