Will Russia Blackmail Mark Zuckerberg?

The news media has been running many stories lately about calls for the U.S. government to break up Facebook.  One idea is to separate Facebook, Instagram and WhatsApp, all of which are owned by Facebook and all of which are controlled by Mark Zuckerberg.  These three websites together dominate social media, and advocates of a breakup express concern about monopolization, and also the potential impact on freedom of speech of having so much of the social media business under a single corporate roof.  Indeed, it's not just a concern about a single corporate holding company.  We're talking about one guy--Mark Zuckerberg--who controls all three of these dominant sites.  Zuckerberg arranged to have himself given supervoting shares of Facebook when the company went public.  So he single-handedly controls everything at these three companies even though he has taken a lot of money from public investors.

Special Robert Mueller indicted a bunch of Russians and Russian companies for interfering with the 2016 election, and his redacted report discusses this problem in some detail.  U.S. intelligence agencies are supposedly combating Russian efforts to muck around in the 2020 election.  Only time will tell how effective the countermeasures are.  We may get a preview from the European Parliament election taking place later this month, which Russia is reportedly trying to influence.

But there's a simpler strategy for Vladimir Putin:  blackmail Mark Zuckerberg.  After all, Zuckerberg controls the whole shebang, and if you control him, you're in a sweet spot.  Zuckerberg is human like the rest of us, and all Putin and his henchmen need to do is find out what his weaknesses are.  This surely has already occurred to them, and they no doubt are nosing around in Zuckerberg's past as much as they can.  They'll try to tally every beer he drank before turning 21, and everything he may have smoked or snorted.  They no doubt will be pro-active, which is an integral part of Russian spycraft.  Pro-activity in this regard could mean things like ensuring that Zuckerberg has the opportunity to meet very attractive, friendly and easy-going women wherever he is, and only later might he find out that they had tiny cameras.  If Putin succeeds in getting a pee tape or its equivalent featuring Zuckerberg, Mark will be in a bad place.

U.S. antitrust law doesn't provide that a company can be broken up because its CEO is subject to blackmail by a foreign nation.  But there seem to be good arguments for contending that Facebook satisfies the legal requirements for splitting it up.  And the distinct possibility that a hostile foreign nation would want to blackmail Zuckerberg provides additional reason to be concerned about allowing today's monolithic Facebook to keep lumbering along. 

There may be some who would suggest that Putin already controls the U.S. government, and would through his proxy (you know who) stop the Justice Department and Federal Trade Commission from taking action to break up Facebook.  Whether or not this is true, Putin would want to blackmail Zuckerberg if he can.  The government--at least those parts of the government that still adhere to their oaths to support and defend the Constitution--should do whatever is possible to stop this from happening.  The rest of us may want to consider taking a break from Facebook, Instagram and WhatsApp.

A Peek Under Facebook's Rug?

There's an old saw about people sweeping dirt under the rug when they do a quick and not necessarily good job of cleaning.   Well, CNBC reports that some Facebook content reviewers are so stressed out by what they see and hear that they are developing symptoms of PTSD, or starting to believe conspiracy theories about 9/11 or the Las Vegas mass shooting.  Reviewers reportedly used drugs or alcohol at work to find relief from their stress, or had sex in bathrooms or a lactating room to escape.  One even said he brought a gun to work in order to protect himself from other employees who made him feel threatened.  See https://www.cnbc.com/2019/02/25/facebook-content-moderators-describe-a-stressful-work-environment.html.  These reviewers, employees of a contractor hired by Facebook, work for wages around $15 an hour to screen violence, threats, hate, and other extreme stuff.  Facebook's contractor says it offers counseling and other assistance to employees.

Is it any wonder Russian government intelligence operatives can use Facebook to undermine American democracy?  Is it any wonder hate groups and other weirdos can use Facebook to promote all manner of sick and extreme views?  Facebook's algorithms can't stop this stuff.  Evidently, Facebook's human reviewers, paid what many consider barely a living wage, can sometimes become so stressed they aren't really able to cope with the job.  So they probably aren't stopping it, either. 

No website is better than its content.  Facebook evidently struggles to control its content.  If its content reviewers can develop PTSD or resort to alcohol, drugs or sex in the lactating room to cope, what reaction might Facebook's users (especially its young users) have to such content?  It may be that so much content is uploaded so fast to Facebook that it cannot truly screen out the bad.  Then again, no website is irreplaceable.  Whatever excuse Facebook may offer for its content problems, no one needs to use it.  The rest of the Internet is a pretty big place, and you're the only person stopping you from exploring it.    

Your Facebook Data Can Be Used Against You

It turns out that Facebook keeps a shipload of data about you.  That stands to reason, since Facebook's business model is to snarf up as much data as possible so you can be targeted for ads that Facebook and its real customers (i.e., the advertisers) hope you click on.  And Facebook would want to keep every scrap of data it has about you (subject to your ability to delete it under Facebook's terms and conditions), no matter how old or seemingly trivial it may be because the more Facebook knows, the greater its ability to target you.  So the information it keeps is pretty extensive, including among other things your facial image (kept through its facial recognition software), all contacts in your phone book, all your Facebook friends (including those that were unfriended), location data (as in where you were at a particular time on a particular day), all the videos you watched, your timeline, all photos you uploaded to Facebook, message traffic, and life events (such as your birth date, graduations, marriages, and so on).  (See https://www.cnbc.com/2018/03/27/facebook-knows-a-lot-about-me.html.)

But all that information can be used against you.  There are probably quite a few possible ways.  Here are a few.  Let's say you have a job that doesn't require you to show up at the office all the time.  Your employer thinks you haven't been putting in a full 40 hours a week and demands that you download and hand over a copy of your Facebook data, so they can check up on what you've doing during the workweek.  You refuse, saying that would be an outrageous invasion of your privacy.  Your employer then tells you to pursue your career elsewhere.  And if you sue?  Your employer might try to use court rules called "discovery" to get a copy of your Facebook data to prove you were goofing off.

So you lost your job and apply for another.  Your prospective new employer says, "we really like you but we'd like to see a copy of your Facebook data, just as part of our due diligence on job applicants."  You suddenly remember all those videos you watched ten years ago, when you were younger and more impulsive and watched a lot of weird stuff, which you wouldn't want a future employer to know about.  You decline to provide your Facebook data, and all of a sudden the prospective job evaporates.  

So you try again with another potential employer, this time a contractor for the federal government.  But this job requires a security clearance, and you are asked to provide a copy of your Facebook data so the contractor can evaluate whether or not you'd get a clearance.  You then recall those stupid videos that you uploaded in college during Spring Break--you know, the ones in which you and your pals were rip-roaring drunk and . . .  well, the streaking was the least of it.  WTF do you do now?  How do you respond to this request?

Let's say you're involved in a divorce--half of all married people get divorced, so this sadly is a pretty common event.  Your spouse suspects you've cheated and tries to use those court discovery rules to get a copy of your Facebook data to see where you've been and who you were with.  What if your spouse succeeds?  What will he or she find out?

Perhaps you're a stock market aficionado, and want to get as much information about a company as you can.  You have a friend who works at the company and you traded the company's stock very profitably.  A government official investigating whether or not you got illegal inside information could subpoena your Facebook data to see if you met with or communicated with your friend who works at the company at a time when your friend might have tipped you off.

Let's assume you've been lucky in life and make a gratifying income.   But you find the demands of the IRS insufferable.  So you take a flight to Panama or some other place that has banking secrecy laws you think might keep the Feds at bay.  The IRS gets nosy and subpoenas your Facebook data.  Would they find out you were in Panama or some other place not mentioned in your tax returns?

There are some people who have lived entirely blameless lives--they hewed to the straight and narrow, never told a lie, never smoked, drank, or took illegal drugs, never had dinner alone with anyone other than their spouses, always helped old ladies across the street, and never said a cuss word.   All three of these people have nothing to worry about.  As for the rest of us, that vast pool of data Facebook may have on you is something to bear in mind.  It ain't going nowhere, and you'll have to live with its consequences.

Your Facebook Data Will Never Be Safe

Unless you've been locked into a backyard bunker waiting for President Trump to start a nuclear war, you know that Facebook is having some rather serious problems with the confidentiality of its users' data.  Data for some 50 million users somehow wound up in the hands of a UK data analysis firm called Cambridge Analytica, which then reportedly used it to assist Donald Trump get elected President of the United States.  Needless to say, the 50 or so million users weren't aware this happened.  Government investigations have started.  A search warrant was executed at Cambridge Analytica and calls have been made for Mark Zuckerberg, Facebook's CEO, to testify before Congress.  But, no matter what happens--Facebook takes more protective measures, government regulation increases, people are tossed in jail--your Facebook data will never be safe.

According to an apocryphal story, bank robber Willie Sutton was asked why he robbed banks and replied, "Because that's where the money is." Facebook's problem is it is where the data is.  Facebook has the best data on the Internet.  It insists on users using their true identities, and it operates a social forum, where it learns who is in a user's social circles, what they think, what they like, what they do, what they want, what they own, where they live, where they work, where they play, with whom they play, what illness and injuries they have, what medications they take, what treatments they get, what music they like, what television and video entertainment they like, where they go on vacation and with whom, what they eat, where they eat, who they like, who they dislike, who they date, who they want to date, who they marry, who they divorce, maybe even who they cheat on their spouses with, how they vote, who they vote for, why they vote a particular way, what their political views are, what their cultural values are, what their religious views are, where they worship, what prejudices and biases they have, what ethnic and racial groups they like or dislike, how they feel about gays, lesbians, transgender people or anyone else, how they feel about this sexual activity or that, etc., etc., etc., so on and so forth.  In other words, Facebook knows AN AWFUL LOT about its users, more than any other website or Internet company. 

Facebook is where the data is--the absolutely best data.  That's why hackers, unscrupulous foreign governments, shady political operators, and all manner of scoundrels and riff raff will continue to swarm around Facebook like a pack of hyenas, snatching whatever data they can get.  As we repeatedly learn just about every week, no repository of data is safe.  Neither governments, military or intelligence organizations, the most sophisticated Internet companies, nor anyone else can keep data safe.  Everyone who has valuable data has been hacked or probably will be hacked some day.  The architecture of the Internet is open, not closed, and true security is simply impossible.  Because Facebook has the crown jewels when it comes to data, the wolves will perennially attack and hack.  And even as Facebook puts up more defenses, the jackals will relentlessly prowl and find new ways to slip through and feed. 

Don't be naive when Facebook tells you they'll find ways to fix the problem.  They've been hoodwinked before, and, being human, they'll be hoodwinked again.  If you're on Facebook, you have a choice to make--have no expectation of privacy at all, or get the hell off of Facebook.

Are Conservatives More Gullible Than Liberals?

A recently released study from researchers at the University of Southern California found that, during the 2016 Presidential election, conservatives were about 31 times more likely to retweet Russian trolls than liberals.  See https://www.vox.com/policy-and-politics/2018/2/24/17047880/conservatives-amplified-russian-trolls-more-often-than-liberals.  Thus, Russian tweets favoring Donald Trump were far more likely to be amplified by retweeting than Russian tweets favor Hillary Clinton.  Conservatives, the data shows, were more likely to be taken in by Russian fake news than liberals.

It's unclear why.  Perhaps conservatives are more likely to be alarmed by the fear-inducing messages that the trolls tended to send.  Or, liberals may tend to think more critically of what they read before accepting it.  Perhaps both tendencies are factors, or maybe something else is operative.  Whatever the case, anyone who participates in social media (i.e., all two billion or so of you) need to be cautious about accepting what you read.  Facebook, Twitter, Google and other social media websites don't ensure you're reading the truth or anything even remotely close to the truth.  They're starting to understand that acting as conduits for messages, however false, isn't a great business strategy because people will eventually tire of being fed falsehoods.  And social media today is way too heavily laden with falsehoods.  People will eventually go to other websites that more rigorously screen the information they display.  Traditional news services may win in the end.

 By all indications, the measures being taken by Facebook, Twitter, Google and other social media websites to combat fake news are inadequate.  Russian bots flooded Twitter with pro-gun messages after the recent shootings at Marjorie Douglas Stoneham High School in Broward County, Florida.  See https://www.cnn.com/2018/02/16/us/russian-bots-florida-shooting-intl/index.html.  No doubt they tried similar measures in other social media sites.  Don't rely on social media for the truth.  Be cautious.  Be skeptical.  You won't win a political debate by pushing messages from Russian trolls.  Truth will prevail in the end---and that means if you buy into messages from Russian trolls, you'll lose.

Guinea Pigs On Facebook

There's a bunch of guinea pigs on Facebook, around 689,000 of them.  You wouldn't recognize them as rodents if you just looked at their Facebook pages.  Instead, you'd probably think they were people, some younger than the age of 18.  But guinea pigs they are, used by Facebook in an experiment to manipulate users' emotions by making the news feeds these users received either more negative or positive, and then measuring the effect on posts written by the g-pigs.  Evidently, g-pigs' emotions could be changed positively or negatively by the content of the posts they received.  In other words, emotion manipulation by Facebook seems possible.

Facebook claims that its terms of service allow this kind of experimentation.  If you didn't read the terms of service, then bear in mind that the possibility of this kind of horseship (sp) is exactly is the reason why you should read them.  But it may also be the case that Facebook's terms of service were kind of general, and written in that uniquely obtuse and obstructive language called legalese.   We would guess they didn't include a guinea pig clause, which explicitly informed users that they might be selected to be subjects in experiments in emotional manipulation where they wouldn't be informed of their selection and the emotional manipulation would be conducted in quite a non-obvious way.  So even if you were among the assiduous 0.01% who actually read the terms of service, you still might not have realized that you had just registered for the guinea pig draft and could be called up for service at any time.

Of course, one suspects that Facebook might not have wanted to let the g-pigs know what was going on.  Unknowing g-pigs would likely produce more meaningful experimental results than users who knew what was going on.  And if one considers Facebook's corporate interests to be more important than the interests and dignity of its users, then all this might make sense.  But if users are thought to be deserving of fair treatment--radical notion, that--then you'd have to conclude that Facebook really stinks for having done this.

The world is full of emotional manipulation: advertisements, political campaigning, editorials, op-ed pages, robo-calls from every manner of charity you never heard of, etc.  And when it's clear that the game is to manipulate your emotions, that's okay (at least when it's directed at adults).  But when emotions are manipulated sneakily, and your participation isn't made known to you, then that's a reason to avoid Facebook and any other social networking websites that pull similar carp (sp). 

You have to wonder if the emotion manipulation experiment signals that Facebook has reached its zenith and is in decline.  Has Facebook run out of bona fide, valuable services to provide to users?  Is it now stooping to emotional manipulation to keep existing users and bring in new ones?  Do we really need Facebook, or have we been manipulated into thinking we need Facebook?

The WhatsApp Deal: Did Zuckerberg Just Blink?

WhatsApp is the antithesis of Facebook.  It doesn't collect personal information.  Messages aren't stored in WhatsApp's servers.  There are no ads on WhatsApp.  As a messaging service, there's nothing on WhatsApp for strangers (or parents) to find via search engines.  It offers the one thing that's almost impossible to obtain on the Internet:  privacy.  No wonder it's growing by a million users a day, many of them in the young adult cohort coveted by commercial websites.

It's unclear what Mark Zuckerberg hopes to achieve by having Facebook buy WhatsApp.  If he engrafts WhatsApp onto Facebook, or makes it semi-clone of Facebook (i.e., has it run ads), it will surely lose much of the privacy it offers.  Facebook's business model, after all, is to vacuum up as much personal information as possible in order to cram advertising into users' faces.  But that could drain away much of WhatsApp's attractiveness to its current user base, and they could easily flee to any of a number of competitors offering private communications. 

If Zuckerberg keeps WhatsApp independent, he'll have to find some way of generating revenue--a shipload of it, since Facebook is paying $19 billion for WhatsApp and the only justification for such a Brobdingnagian price would be freight cars full of revenue.  But you can't charge users much for instant messaging services (the phone companies tried that with text messaging and users are moving away from them).  So there is a big question about what kind of rabbit Zuckerberg will pull out of the hat as a business strategy for WhatsApp.

One thing that seems apparent is that he's blinked.  Zuckerberg evidently has come to realize that Facebook isn't going to be the platform for all users all the time.  He's jumping onto one of the new, hot things on the Internet.  Diversifying Facebook's corporate profile may be a prudent move.  But the company now has two conflicting business models under its corporate roof, and it will have to sort out how to handle these conflicts.  History does not suggest success is assured by any means.  Microsoft entered various lines of business that were potential threats to its basic MS-DOS/Windows business--search engines, portals, mobile software, etc.  It didn't managed them very well, because boosting a newer technology could mean undermining its cash cow.  Newer, nimbler competitors, unburdened by these conflicts, ran circles around Microsoft.  Facebook is one of them.  But now it has taken in-house a conflict between the old (yes, Facebook is getting old) and the new on the Internet.  How Facebook handles that conflict could dictate the future arc of its growth.

The Beginning of the End For Facebook

Today (April 2, 2013), the SEC announced that public corporations can use social media such as Facebook and Twitter to announce information to investors.  (See http://www.sec.gov/news/press/2013/2013-51.htm.)  Now that Facebook has been given official recognition, it becomes irredeemably uncool.  Who wants to spend time on a website where trends in product sales and revenue growth are disclosed?  Or the latest in earnings per share?  Yuck.  Where's the fun in that?  After all, social media sites are, above all, supposed to be fun.  Now that Facebook is becoming a place where serious stuff is discussed, the fickle herd of young and highly mobile people crucial to the success of any social media website will get bored and look around for something that's more entertaining.  Bye, bye, Facebook.

Why Doesn't the Fed Fix Facebook?

By all indications, the Federal Reserve has taken up the job of keeping the stock market happy. It's high time the Fed fixed Facebook. There may be good reasons why Facebook has lost half or more of its IPO value. But there are also good reasons why the the economy is in the doldrums. Just as the Fed has fired off numerous weapons to stimulate the economy and make the financial markets feel better, the Fed should make Facebook investors happy. They'll increase their consumer spending if their stock goes up and that will boost the economy. Everyone will be happy because QE is the source of all happiness these days.

The Fed should announce QE-Facebook: it will buy up FB shares, not at the current market price but at the original IPO price. After all, the point is to boost confidence, and bailing FB investors out of their losses is a good way to boost confidence. Nothing better than a do-over when you made a boo boo. Better yet, the Fed should buy FB shares at double--no wait, triple--no wait, quadruple the IPO price, or $152 a share. That way, investors would get the benefit of the IPO pop they were all expecting. That would really give the economy a zing.

There's no logical reason to stop with FB. The Fed could also buy Zynga and other IPO stocks at pop prices. Indeed, the Fed could simply announce QE-stocks and stand as a ready buyer in the stock markets for all stocks at whatever price investors expect however unreasonably.

Throughout this summer, the stock market has moved up as the world economy has deteriorated and the U.S. economy has slowed. This rise was all because of central bank easing and the expectation of continued central bank easing. Unlimited central bank easing is the best kind, and the ECB just served it up (kind of, see the preceding blog http://blogger.uncleleosden.com/2012/09/whats-behind-ecbs-unlimited-bond-buying.html). The days when central banks would take away the punch bowl just as the party was warming up are long gone. Now, the central banks host the parties, which always have open bars. If the Fed wants a good party, it should open up the taps and let them flow freely. QE-Facebook. QE-Zynga. QE-all stocks.

Winners and Losers in the Facebook IPO

WINNERS

Billionaires and Millionaires. Some Facebook investors and employees had a very good day. A few of them became billionaires and quite a few became millionaires.

Facebook. The fact that there wasn't much of a pop in the stock after trading began means that Facebook left little money on the table when it priced the offering at $38 per share.

Selling shareholders. More than half the stock offered was sold by investors and employees who had gotten their stock privately before the IPO. The lack of a big pop means they, too, left little money on the table when they sold.

California. The State of California stands to collect something like $2 billion in taxes from sales of Facebook stock by state residents. With the state's finances in the fiscal ICU, that's like manna from heaven.

Short sellers. The fact that the stock closed barely above the offering price indicates that many shareholders are looking at Facebook as a short term play. Like wolves scanning a herd of caribou for any animal displaying signs of weakness, short sellers are always on the alert for flagging shareholder interest. They may find a juicy target in Facebook.


LOSERS

Nasdaq. The opening of trading in Facebook was delayed for "technical" reasons that are now being poked into by the SEC. Press reports indicate that order execution for many investors was sloppy and slow. Not the kind of publicity Nasdaq needed from the highest profile IPO of the year.

Morgan Stanley. MSCO got the highly coveted lead underwriter position. Then it had to earn its fee when the stock began threatening to drop below the $38 IPO price. MSCO may have bought a shipload of stock toward the end of Friday, when trading opened, in order to keep the price above $38. Tomorrow, the second trading day for Facebook, could bring more challenges.

Money managers. Mutual fund managers and other money managers like IPOs with big opening day pops. They use their market connections to score a big allotment of the IPO, and sell some of it into the pop, getting a fast buck that's needed. Most money managers don't match the S&P 500, and non-typical gains like IPO pops are important to help them stand out from the crowd. Facebook wasn't a good IPO for them.

Tech companies planning IPOs. The tepid Facebook pop may put a damper on IPOs planned by other tech companies. The "technical" problems encountered by Nasdaq, market of choice for tech companies, won't add to anyone's enthusiasm. If investors don't have a good time with a high profile IPO like Facebook, they'll be wary of other, less glamorous ones.

Mark Zuckerberg. Billionaire, just married, he's got to feel like he's at the top of the world. The market will disabuse him of that notion in a couple of trading days, at most. He'll learn that public company stocks are traded short term, which means that he's expected to deliver, every quarter on the quarter end. Whatever his long term goals for the company, the short term performance will have to be gorgeous, and then more gorgeous the next quarter, or the stock price will be hung, drawn and quartered (pun intended). It gets personal, too. One lousy press release from the company, and bad things will be done to his effigy. He'll be made to understand, not in a fun way, that short sellers will be a permanent presence in his life, trying to financially actualize schadenfreude. Sooner or later, one or more of Facebook's officers, directors and employees will leak inside information to family and/or friends, and embarrass the company when federal authorities swoop in. He'll feel betrayed, but he won't be able to prevent it. He'll feel every uptick and downtick of the stock's price, because shareholders will make sure he feels ticks. Any significant failings by the company will lead to his introduction to the most prominent class action plaintiffs lawyers in America. As SEC rules compel him to make disclosures about his compensation, perks, transactions with the company, holdings of company stock and a variety of other things, he might end up feeling like he has less privacy than the most effusive of Facebook users. Surely, Zuckerberg has already been counseled by his advisers about all of the foregoing. But the reality of his new life running a public company won't sink in until he lives the full, graphic experience. There's a price to pay for going public, and the bill collectors are gathering.

Are the Social Networking Companies Approaching a Peak?

The frenzy over LinkedIn's IPO a couple of days ago, in which its stock more than doubled in price during its first day of trading, is reminiscient of the tech stock mania of the late 1990s. In those halcyon times, companies with no profits, scant revenue and highly optimistic business plans were going public with enthusiastically received IPOs. The stock market was pushed up to levels that it hasn't, on an inflation adjusted basis, since regained. Of course, we all know the tech stock craze went the way of leisure suits, although the financial consequences from stocks were much more painful.

Leisure suits have made a comeback of sorts in the past year or so. And so have tech stocks. The craze du jour is social networking, which proponents claim to be the grand future architecture of the Internet. Maybe. Something similar was said two decades ago about Microsoft, whose MS-DOS operating system was virtually ubiquitous among personal computers. But Gates & Co. didn't get the Internet, which was then struggling to organize itself around a concept called the World Wide Web. Then, a decade ago, portals were seen as the behemoths of the 21st Century. Today, only Yahoo is left as a major albeit struggling portal. A half dozen years ago, Google was expected to be heir to the Internet throne. Today, it is a growing and prosperous company whose vision thing is flagging. Google once was going to become the library to humanity. Legal squabbling over copyright ownership of large numbers of books has bogged down that initiative. Google is a leader in cloud computing, but Amazon will offer formidable competition. Goggle had to play catch up in the browser battles against a nonprofit that puts out Firefox. Google's failed attempt last year to buy Groupon was a signal that its ascendency to the throne of the Internet is no longer seen as inevitable. If Google is a sure fire winner, why wouldn't the Groupon folks want to associate themselves with Google?

But no matter that previous innovators have matured and shrunken to mere mortal companies. Social networking is hot, and investors pant for shares. Logical analysis fell by the wayside with LinkedIn. It had $15.4 million of earnings last year yet has a current market cap of around $8.8 billion. Its 95 million shares outstanding are worth $93 or so each at current market prices. Earnings per share are about $0.16, resulting in a price-earnings ratio of 581 to 1. Considering that the p/e ratio for the S&P 500 index based on trailing earnings is around 17, it's fair to say that investors are, at a minimum, extremely optimistic about LinkedIn.

Facebook, the big prize among anticipated IPOs, has dallied in the not very private private placement market, where transactions reportedly imply a valuation of as much as $70 billion. While the absence of solid public information makes Facebook's valuations somewhat amorphous, it's clear that public investors are getting whipped into a frenzy by all the press coverage of Facebook's private offerings. Facebook has indicated it might go public in the next year or so. When it does, that's likely to be a major signal of a peak in social networking stocks. A lot of really savvy Wall Street insiders huddle around the corporate insiders at Facebook. Those folks surely won't sell until they believe they can maximize the price they get, which by definition minimizes the bargain public investors will get. It's possible for public investors to make money from an IPO (Google is one example). But the IPO is a moment when the odds may well be stacked against the little guy. Invest carefully.

A Key to Facebook's Valuation

Recent press reports indicate that Facebook may go public in a year or so. Its recently reported private placement deal with Goldman Sachs supposedly put a $50 billion valuation on Facebook. Many think this is an optimistic number. Conventional measures of value are hard to apply to Facebook because it doesn't publicly disclose its finances. Uncertainties about its business model add to the problem. One wild card is the continued evolution of online privacy policies.

In many respects, online privacy is an oxymoron. Every day brings news of yet more security breakdowns and thefts of personal information. There doesn't seem to be a website that can't be hacked into, one way or another.

But online crime isn't the most important factor affecting online privacy. The commercialization of the Internet is far more significant. Businesses that want to sell your personal information will do much more to reduce online privacy than pimply kids eating junk food in front of computer screens.

Banks are starting to place targeted ads in your online statements. If your bank account shows, say, several recent debit card charges for fast food breakfasts, you may be offered a discount on your next Egg McMuffin. Some bank customers may like the idea of getting a discount while they review their account activity. Others will be creeped out by the idea that the most confidential financial information they have is being mined for the further profitability of purveyors of salt, sugar and fat. Many customers would be outraged at the possibility that insurance companies might pay to know about their slovenly eating habits and charge them higher life, health or disability insurance premiums. Actual insurance company access to your bank account hasn't been reported in the news, but don't think insurers--and the websites that are collecting your personal information--aren't pondering the possibility.

Banks have a lot of ways to make money, yet they are trying to profit from selling your personal information. Think of the pressures on Facebook, which has far fewer potential revenue streams than a bank. The most valuable thing Facebook has is the personal information it gathers about its members. If it can't find a way to monetize that data, its future could be difficult.

The FTC is proposing guidelines about online privacy. Members of Congress are getting interested in the issue and may offer legislation. One way or another, the law in this area will evolve and soon. When it does, Facebook's stock market value could rise or fall, depending on what rules are imposed. Indeed, since the monetization of personal information is likely to be Facebook's biggest potential revenue stream, online privacy laws could be crucial to determining the company's valuation.

Maybe Facebook Just Wants to Keep Mum

The SEC is reportedly interested in Goldman Sach's recent deal with Facebook to invest around $500 million and maybe up to $2 billion, some of which will be raised from well-to-do investors. A lot of speculation has popped up in the financial press about what Facebook is doing and why the SEC might be nosing around. Commentators harrumph about the burdens of complying with the federal securities laws and insinuate that the SEC's interest may amount to regulatory overreach that interferes with financial innovation. They imply that Facebook and GS may be fashioning a brave new financing structure for companies that don't want to be forced into the SEC's 1960s vintage regulatory model, and that the SEC is poking around to protect its turf.

The truth may be a lot simpler. Facebook hasn't publicly defined a clear business model. There is good reason to suspect it doesn't have one. It doesn't sell anything to users, and derives much of its revenue from banner advertising. Banner ads aren't generally viewed as the wave of the future for websites. So Facebook is most likely a work in progress.

Its biggest rival is Google, and Facebook doesn't participate in Google's targeted advertising programs. If Google could place targeted ads on Facebook, it might be able to collect enough information to develop its own, improved social network (and Google has the cash--maybe $30 billion plus--to do it). Facebook might, in effect, provide Google with the means to undermine Facebook.

Facebook could try to develop its own targeted advertising program (after an early failure in 2007). But that would take a lot of work, and would put it in direct competition with Google and Google's $30 billion cash hoard. Facebook may be an aircraft carrier to Google's battleship, but an aircraft carrier doesn't want to get within range of a battleship's big guns. So Facebook is probably still figuring out what its principal revenue streams will be.

The SEC's disclosure regulations would require Facebook, if it went public, to reveal a lot about its business activities and risks. First and foremost, Facebook would have to report detailed financial information; and the impression one gets is that Facebook isn't a gusher of net profits yet. If its business model is still a work in progress, it won't have the most glowing picture to paint. That would translate into a less than meteoric rise in its stock price.

A company doesn't go public until it's got a good story to tell about itself. That's how insiders get juicy valuations for their shares. Facebook has little incentive to try to develop a new financial paradigm to go "public" in a private manner, because it wouldn't maximize share price right now. There's a news report on Money.cnn.com saying that Facebook will use the money it's raising from Goldman to buy back employee stock and keep the number of investors below the 500 shareholder level where Facebook would have to start filing the reports required of a public company. http://finance.fortune.cnn.com/2011/01/05/facebook-raising-goldman-money-so-it-wont-go-public/ Assuming that's true, the whole point of the GS deal is to avoid going public. That would seem to make sense, from a business standpoint. The SEC will find whatever it finds in its inquiry, and the possibility that GS and Facebook might have tripped over a regulatory requirement somewhere cannot be discounted. But the whole thing may be, not a sneak IPO, but a bid to stay private until Facebook's founders can hear the cash register ringing really loudly.