Facebooks and Sales Ledgers

So, if I understand it correctly, the way to become the world’s youngest billionaire is to sit up late at night, in your college dorm room, drinking beer, and hacking code that lets people see photos of faces of fellow students. Go figure. I thought making money was about selling something that other people want to buy. To be fair, in a way, Mark Zuckerberg did make and sell something that other people wanted to buy. He did that when selling stakes in Facebook, first to private investors, and then publicly. He made something – a website, essentially – that other people wanted to buy. That sales aspect worked out great. Lots of people wanted to buy a piece of Facebook, because they expected to make money by selling that piece of Facebook to somebody prepared to pay more, just to own (and then sell) a piece of Facebook. Peter Thiel was one of the guys who did that best. Thiel took a chance when pumping USD500K into Facebook in the early days, and has just taken his first opportunity to offload USD400m of stock, not that everyone is happy about that. The problem with buying and selling is that eventually you have to find a buyer who wants to own a piece of Facebook not because they intend to sell it, but because they want to keep a slice of Facebook’s operating profits. Eventually you have to find a buyer who wants to buy into the revenue stream that the website generates. And if the website does not generate the profits that justify the website’s stock price, then somebody ends up looking a sucker-berg, instead of a Zuckerberg.

The dismal collapse in the share price of Facebook has, and continues to be, widely covered in the press. See here for a telling and recent analysis from The Economist, which is downbeat about Facebook’s potential for revenue and profit growth. Some of this is perfectly understandable schadenfreude. There is no need for me to add to that, especially as a 50% drop in the value of Facebook still leaves a company that is valued at around $50 billion. It is more interesting to comment on what this drop tells us about how people value communication generally. It tells us that people are lousy at valuing it, especially when trying to estimate future sales. What is communication worth? Well, that rather depends on what is being communicated, by whom, to whom. For example, most adverts are worth zilch, when sent to me. In fact, they can be worth less than zlich, because I am the kind of stubborn grumpy goat that will consciously punish annoying companies by buying the products made by rivals, not that anyone seems to have noticed when I do that. But evaluating the commercial worth of communication is very pertinent to applying a rational estimation of the worth of any new project, initiative, or venture that is based on communication. In short, for all the enhancements of communication, many people rely on rubbish data when it comes to estimating risks and rewards.

Part of the problem with data is that even if you have a list of assets, such as customers (including their name, address, phone number, present location, relationship status, shoe size and the length of their inner ear canal), that does not mean you can accurately estimate how much each asset is worth. It is bad enough estimating the value of a house or a car. What is the value of a Facebook user? And when I pose that question, I immediately remind myself that there is no such thing as a ‘typical’ or ‘average’ user. Each person is different. If 95% of users never do anything that would generate revenue, then they are very different people to the minority who do the things that do generate revenue. So understanding the value of an asset is not liking knowing the total number of users, the total amount of revenue that is generated, and then dividing one by the other, to come up with an average. That ratio is just a pseudo-fact… though it is the kind of pseudo-fact which is all too familiar to people working in the communications industry.

Knowing the detail about the worth of assets can highlight where assumptions break down. Is it a good thing when Facebook adds users? Superficially, the answer should be yes. But there is nothing good about adding 80m fake users. I think it is fair to surmise that if one person creates two accounts, that does not mean they will generate twice as much revenue for Facebook in the long run, though in the short run you might see a burst of revenue as advertisers get stung for meaningless activity. The point was illustrated when a BBC journalist created a bogus company that supplied ‘virtual bagels’, and found that this ‘business’ was liked by an improbable number of teenagers in Cairo. I doubt teenagers in Cairo really do have a special interest in non-existent foodstuffs.

When it comes to social networks, diving into data is a good thing, not just for managers for also for shareholders and customers too. When we look at data, we must look for downsides as well as upsides. Facebook’s falling share price tells us that investors and banks did not place enough emphasis on the difficulties of translating a nice social toy into a money-making business. They were a bit too willing to accept the optimistic but vague assurances of those who stood to gain from an over-inflated floatation, though it is also possible that Facebook’s management do not understand their own revenue potential, and that can occur for many reasons. In particular, bias can be both conscious and unconscious. Obtaining and correctly assessing downside data is not just a technical, organizational and operational challenge. It can also go against the grain of human nature, especially when it feels like everybody else is backing a winner. Running with the crowd is the fundamental dynamic of any boom that turns to bust. The communications industry is as prone to that failing as any other, which is ironic given that one of its selling points is how much data is have. And this raises plenty of questions about the role and remit of revenue assurance, and how much it should be analysing future revenue potential as well as past and current cash collection. In an industry that is all about communicating with people, the recurring surprise is that those people continue to be total strangers.

Eric Priezkalns
Eric Priezkalns
Eric is the Editor of Commsrisk. Look here for more about the history of Commsrisk and the role played by Eric.

Eric is also the Chief Executive of the Risk & Assurance Group (RAG), a global association of professionals working in risk management and business assurance for communications providers.

Previously Eric was Director of Risk Management for Qatar Telecom and he has worked with Cable & Wireless, T‑Mobile, Sky, Worldcom and other telcos. He was lead author of Revenue Assurance: Expert Opinions for Communications Providers, published by CRC Press. He is a qualified chartered accountant, with degrees in information systems, and in mathematics and philosophy.