I Don't Want Wall Street in My Social Network
Jan 19, 2011 5:00 AM PT
As someone who sees value in at least some social networking sites, I'm more than a little uncomfortable with all the attention that Wall Street suddenly is directing toward this sector.
For the past few weeks, we've been bombarded with stories about the potential for various social networking companies to raise ridiculous sums of money in public stock offerings. Naturally, Facebook, the undisputed ruler of the social networking realm, has garnered the most headlines, along with the highest estimated valuation at US$50 billion.
Groupon, the purveyor of discount coupons for local businesses, is worth $15 billion, making it the second most valuable social networking site, according to Wall Street estimates.
I find fault with these numbers for several reasons, starting with the fact that my two favorite social networking sites -- LinkedIn and Twitter -- have been deemed to be worth a mere $2 billion and $3.7 billion, respectively.
The Future of Social Networking
Actually, I have no vested interest -- financially, emotionally or otherwise -- in how much any particular social networking site is judged to be worth. As a technology journalist, however, I am extremely interested in how all this talk of multibillion dollar payoffs will impact the future of social networking.
Twitter and LinkedIn are my favorite social networks because I find them to be effective business tools. LinkedIn helps me keep in contact with past business associates in a way that no contact list ever could. Whenever my connections update their profiles, I know where they are and what they're doing, and I always have an easy way of reaching them.
I know Facebook does the same thing for old friends, but Facebook also has a lot of, let's just call it "juvenile," stuff floating around the site that I'd rather not get involved in. So, I find other ways of staying in touch with friends.
There is one thing I don't like about LinkedIn: the way some people join special interest groups -- such as the Media, Advertising and Journalism Jobs Network that I belong to -- in order to pepper other members with emails about their resume writing services or Internet-based business opportunities.
I have to confess to using Twitter to promote this column, but that feed only goes to people who have chosen to follow me, which means they presumably are interested in what I have to say.
While I get more commercial messages through LinkedIn than I would like, I find them fairly easy to ignore and even easier to delete. I fear that might change, however, if LinkedIn goes public and is forced to start generating sufficient revenue to satisfy the shareholders.
Selling User Info to the Highest Bidder
Will I suddenly be smacked with an onslaught of spam, bludgeoned by pop-ups or, even worse, have my personal information auctioned off to the highest bidder?
If you don't think that's a possibility, then you don't understand why Facebook and Groupon have been christened social networking's most valuable sites.
Wall Street obviously sees advertising as the primary way of making money in this arena, and Facebook and Groupon currently are in a better position than any of the other networks to turn large numbers of their users into ad consumers.
Groupon has become so popular in some cities that it has generated complaints from businesses that found themselves confronted with more customers than they could handle -- and actually losing money in the process -- after issuing Groupon coupons.
Though it continues to wrestle with privacy issues, Facebook has maintained something that all Internet-based advertisers covet: a large, loyal user base. The social games that are becoming increasingly popular features of Facebook are enticing users to spend more time on the site, making it even more appealing to advertisers.
While social networks seem like ideal platforms for generating ad revenue, I question the validity of the valuations currently being attached to these sites. I'm skeptical mainly because the primary source of these valuations is Goldman Sachs -- the same Goldman Sachs that the SEC recently charged with committing multiple acts of fraud in connection with the nationwide mortgage crisis.
I Don't Trust Goldman Sachs
Goldman established the value for Facebook after investing $450 million in the company and securing an agreement to offer shares of Facebook to a select group of its most wealthy clients while the company remains private. This deal also gives Goldman the inside track on being the investment bank that handles what is expected to be an eventual Facebook IPO. Goldman also is lobbying to play the same role when Groupon goes public.
In the case of the private Facebook stock offering, Goldman expects to sell shares to investors who pony up a minimum of $2 million each. It would then put that money into a special fund that it manages on behalf of those clients. This type of fund, known as a "special purpose vehicle," was used by Enron before that once high-flying energy company imploded in a major financial scandal in the 1990s.
Soon after word of this arrangement became public, Goldman announced that it had decided to limit the offering of privately traded Facebook shares to non-U.S. clients. The SEC has neither confirmed nor denied that it questioned this deal, but I find it hard to believe that Goldman didn't believe it was about to come under some new regulatory scrutiny.
Beyond my distrust of Goldman Sachs, I don't like the idea of social networking companies going public, at least at this time, because that typically turns out to be the first step in an industry shakeout. Remember when AOL and then Yahoo were the hottest names in the tech industry?
I don't see Facebook crashing and burning under the weight of an IPO, but Groupon, which already has many competitors, could be vulnerable. A company like LinkedIn also could find itself in trouble if it were to start working harder to satisfy shareholders than users.
I'd just hate to see companies that could potentially employ a lot of people for a long time -- and possibly create technology that could help other companies -- flame out prematurely just so a handful Wall Street bankers can cash a few more fat bonus checks. I saw enough of that when the dot-com bubble was deflating.
TechNewsWorld columnist Sidney Hill has been writing about business and technology trends for more than two decades. In addition to his work as a freelance journalist, he operates an independent marketing communications consulting firm. You can connect with Hill through his website.