Explaining Southern California's economy

Facebook IPO: Three important things from the SEC filing

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Facebook founder and CEO Mark Zuckerberg speaks during a news conference at Facebook headquarters on October 6, 2010 in Palo Alto, California.

Facebook filed for an IPO with the SEC late today. I've had a chance to review the S1 document, although I didn't really dig deeply into it. That can come later. The CliffNotes version is that there aren't any huge surprises here, as far as Facebook's financials go. There are over 800 million users. The business is all about advertising, the source of almost all of Facebook's revenue. 

So what are the little surprises?

1. Facebook's future hinges on mobile. As plenty of folks have pointed out, pretty much everybody who is going to use Facebook already does — on a computer. This is where the money comes from: advertisers want to reach those people. On mobile devices, by contrast, Facebook doesn't do ads yet. There could be growth here. But mobile could also steal from Facebook's computer-bound business. From the S1:

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Facebook files for IPO, Zuckerberg outlines his vision for 'rewiring' us

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Facebook founder and CEO Mark Zuckerberg speaks during a news conference at Facebook headquarters on October 6, 2010 in Palo Alto, California.

Facebook waited until the end of the business day in New York to file its S1 papers with the Securities and Exchange Commission — the prelude to what could be the biggest tech IPO of all time later this year. 

But who cares about the money? For Facebook CEO Mark Zuckerberg, who's worth about $25 billion, it's all about togetherness. This is from his letter that accompanied the filing (thanks to Nicholas Carlson and Business Insider for the quick breakdown):

We hope to strengthen how people relate to each other.

Even if our mission sounds big, it starts small — with the relationship between two people.

Personal relationships are the fundamental unit of our society. Relationships are how we discover new ideas, understand our world and ultimately derive long-term happiness.

At Facebook, we build tools to help people connect with the people they want and share what they want, and by doing this we are extending people’s capacity to build and maintain relationships.

People sharing more — even if just with their close friends or families — creates a more open culture and leads to a better understanding of the lives and perspectives of others. We believe that this creates a greater number of stronger relationships between people, and that it helps people get exposed to a greater number of diverse perspectives.

By helping people form these connections, we hope to rewire the way people spread and consume information. We think the world’s information infrastructure should resemble the social graph — a network built from the bottom up or peer-to-peer, rather than the monolithic, top-down structure that has existed to date. We also believe that giving people control over what they share is a fundamental principle of this rewiring.

We have already helped more than 800 million people map out more than 100 billion connections so far, and our goal is to help this rewiring accelerate.

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Facebook IPO: Will it rescue venture capitalism?

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Facebook founder and CEO Mark Zuckerberg speaks during a news conference at Facebook headquarters on October 6, 2010 in Palo Alto, California.

The venture capital business has been under some stress for a while now. It's not that it's doing all that badly. It's just that it isn't doing as well as it has in the past. This is related to the overall weakness in the economy, not just in the U.S. but also Europe: it's tougher for VCs to raise money, and it's tougher for VCs to sell their portfolio companies to established firms or exit their investments via initial public offerings (IPOs).

But that could all change with the much-anticipated Facebook IPO, due to happen later this year. 

Or not. This is from Fox Business:

“A little wind may have left the sails after some of the big name IPOs failed to live up to the overblown expectations. VC fundraising challenges are likely to start having a negative trickledown effect,” Tom Rodgers of Advanced Technology Ventures said....

That mixed track record is putting even more pressure on Facebook, which is expected to become the largest Internet IPO on record. Unlike some of the recent Internet companies that stumbled, Facebook has a well-developed business model and an estimated $4 billion in annual revenue, which may pave the way for a valuation of up to $100 billion.

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Freddie Mac scandal: It goes on and on...

While Sales Of Existing Homes Rise In July, Prices Continue To Fall

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A recent ProPublica/NPR report on Freddie May refusing to refinance mortgages for struggling homeowners shows that the market is still coming to terms with new ways of measuring risk.

Jesse Eisinger and a ProPublic co-author, Cora Currier, along with NPR's Chris Arnold, have followed up on their original story about Freddie Mac allegedly betting against homeowners being able to refinance their mortgages. To summarize without getting too deep into risk-mitigation instruments and complex financial jargon, Freddie was using these things called "inverse floaters," and more or them than Eisinger originally reported ($5 billion), to...well, what exactly? Eisinger argues that they were being used to bet against homeowners refinancing out of high interest rate mortgages — a neat trick, given that Freddie could set the refinancing rules.

Some bloggers, myself included, have asked whether this really what was going on. Eisinger posted a lengthy comment on my blog and also Felix Salmon's blog at Reuters, helpfully addressing many of the issues that the debate over the story has raised. Felix fires up his analogy-o-matic and provides a good, simple explanation of what Freddie was up to (it involves, cleverly, a real-estate hook). Ultimately, he agrees with Eisinger:

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Facebook IPO: It's all about the advertising

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Facebook founder and CEO Mark Zuckerberg speaks during a news conference at Facebook headquarters on October 6, 2010 in Palo Alto, California.

This information is all over the place, but I got it from the Globe and Mail:

Facebook generated about $4.3-billion in revenue last year, according to estimates from the research firm eMarketer, with advertising accounting for nearly 90 per cent of that amount. This year, the company should post revenue of nearly $6-billion, eMarketer forecasts.

And one assumes that 90 percent of that $6 billion will also come from advertising. And when Facebook makes $100 billion, many years after its IPO, 90 percent of that will come from advertising.

Does that sound like putting too many eggs in one basket? Maybe. Except that Google is putting more in one basket. It made $37.9 billion 2011 — and 96 percent of that was advertising!

This week, Facebook is expected to file with the Securities and Exchange Commission, for an IPO later this year. So everyone will finally get a look behind the curtain of how the business is run, financed — and where the revenues really come from. But let's be honest. It's all going to depend on advertising, advertising, advertising. This could be a problem for Facebook's long-term growth and profitability because Facebook might have already signed up just about everyone it can. That's a huge audience — and that audience spends LOTS of time on Facebook — but they're not on Facebook for the same reasons they're on Google.

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