I've been meaning to write something about Facebook — whose IPO on Friday is now hitting the stratospheric prospective level of $16 billion, with 422 million shares for sale — and General Motors, whose 2010 IPO set the record for public offerings, at $20.1 million (478 million shares sold). GM came out at $33 per share, while Facebook could debut at $38.
But of course GM's IPO was its second. IPO number two was necessary to return to the public markets after the company's bankruptcy in 2009. IPO number one took place back in 1916. In the intervening period, GM grew to be the most important company in the American corporate firmament, owning half the U.S. auto market during its Golden Age in the 1950s and employing hundreds of thousands of people.
Facebook is still relatively young, but it's the dominant social network, with nearly a billion users and the ability to make billions each quarter by selling ads against content and activity that's for all practical purposes donated. However, Facebook doesn't employ hundreds of thousands and never will. And that's why GM's decision to pull $10 million in ad spending from the site, saying it's been "ineffective," is very interesting.
Why is GM messing with Facebook's IPO, by revealing a critical vulnerability in how Facebook relates to its advertising clients? (Or not, if you agree with James Altucher's analysis here at Yahoo Finance.) After all, as my old CBS.com colleague Jim Edwards deftly notes at Business Insider, big companies like P&G can easily decide to stop spending money on paid advertising because they can do just as well on Facebook for free. GM may be taking that a step further, deciding that it doesn't need to spend money on Facebook because it can do what it needs to do there for free.
This is Facebook's worst nightmare: If P&G and GM both question why they should pay to be on Facebook, how long before Facebook's other big advertisers—American Express, AT&T, Disney, Verizon—suddenly ask, Hey, where's the return on investment?
What this dustup really highlights is the difference between being a company that buys advertising and one that sells it — or in Facebook's case, that sells space on the platform that attracts the users whom the advertisers are targeting. Google also makes nearly all its money off ads, but it does so through search — users trying to answer a question, basically, or solve a problem, or find something that they already want to buy — rather than through social activity.
In a way, Facebook is more like personalized, interactive television or a magazine. While you're doing something you're actually interested in doing, like looking at your brother's new baby pictures, you have ads flashed at you. Or to consider this in terms of the TV model, you have ads interrupt what you're interested in doing.
So Facebook, even though it bills itself as a technology company, is really just a media company.
And while media enterprises can have a huge audience — think the old Time magazine, or Playboy at its peak — they never wind up employing truly significant numbers of people. Why would Facebook ever have, or want to have, 500,000 people working for it? That is, people it actually has to pay to create its content. Obviously, it already has more than 500,000 people working for it, but they're uncompensated.
This is the big difference between the Great American Company of the 20th century and the potentially Great American Company of the 21st: one paid the middle class to build its product; the other doesn't pay the middle class to build it.
GM isn't perfect by any stretch of the imagination. But neither is Facebook. And now we can see why the two companies might have a difficult time getting along. Facebook wants its users to work for free, but it wants advertisers to pay. But now advertisers may be figuring out that they can advertise for free.
Remember, nobody ever thought that they could get a car for free. The point is that if you start playing in the realm of free, it could wind up destroying your business in the end. Maybe Facebook won't get 103 years out of its first IPO.