Opinions - 05.06.2012 - 00:00 

What are your friends worth?

After the descent of social network Facebook’s stock price, there is talk of deceit and manipulation. Are those reproaches justified? Finance communication expert Christian P. Hoffmann on the speculation about Facebook’s “social capital”.


4 June 2012. Long before its execution, the initial public offering (IPO) of Internet giant Facebook was rated as the event of the financial year or even of the decade. Stock market insiders, and those who would like to be, discussed the details of the share issue as excitedly as teenagers discuss the love life of their music idols: which investment banks would accompany the transaction, how many shares would be offered, would company founder Mark Zuckerberg himself go on a promotional tour?

Like almost no other, Facebook’s IPO was characterized by imagination and speculation. One can hardly blame the capital markets for this. They have the thankless task of deciding on the proper price for a company’s shares. This price, however, is not based on its physical assets, which present a comprehensible market value. No, it is the ideas, the people and the opportunities for development that constitute its value. The capital market has to evaluate the future of a business – and that, as we know, nobody can foresee.

Social capital as a store of value
So, what is a company like Facebook worth? That depends on how much profit it makes in the future. And this profit in turn depends on exactly how the company generates revenue. It is this question that is difficult to answer in the case of Facebook – maybe not even Zuckerberg knows the answer. Facebook is arguably the most important representative of a new type of media, the social media. These Internet offers serve the exchange, the networking and the collaboration of their users. And no social medium has more users than Facebook. 900 million people communicate there – the billion mark probably will be cracked soon.

Social media democratize public communication. Every user gets a platform to display himself, his personal opinions, activities and achievements. That is why the capital of social media consists of the communication of their users – of the interaction networks they span and maintain. Strictly speaking, it is social capital: it is the relations and the exchanges of the people among themselves that generate value.

Speculation about new business activity
The Facebook creators’ vision is especially ambitious. Users are supposed to reveal their lives on the platform: their contacts, preferences, movements, passions – and of course, again and again, their interactions. Who is doing what with whom, when and where? Thus, Facebook creates a virtual parallel to our social world. Whatever we do in our everyday life is provided with equivalent information online.

Facebook as the communication backbone of all our activities. Would such an offer be valuable? Without doubt. Could it be worth more than $100 billion? Probably. But how can this value be converted to the last cent and who will receive it? Those questions remain completely open. The opportunity to load customized advertisements into our virtual parallel world may be valuable – but it only scratches the surface of opportunities for new business activities.

Ultimately, many uncertainties remain: how much money will Facebook make in the next few years, and how? Will Mark Zuckerberg manage to realize his ambitious vision for the most important social medium in the world? The IPO gives all of us the opportunity to invest in a fascinating development and participate in its chances – but also in its considerable risks. Of course, Facebook shares are a speculative investment. But at least we are free to speculate about the future of a fascinating new medium. What more can one expect from us and from the capital markets?

Picture: Photocase / Bastographie

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