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Personal Data's Value? Facebook Is Set to Find Out

Personal Data's Value? Facebook Is Set to Find Out

By Somini Sengupta & Evelyn M. Rusli, New York Times | Updated: 5 June 2012 01:09 IST

Highlights

The social network is poised to file for a public stock offering on Wednesday that will ultimately value the company at $75 billion

Facebook, the vast online social network, is poised to file for a public stock offering on Wednesday that will ultimately value the company at $75 billion to $100 billion, cashing in on the fuel that powers the engine of Internet commerce: personal data.

The company has been busily collecting that data for seven years, compiling the information that its more than 800 million users freely share about themselves and their desires. Facebook's value will be determined by whether it can leverage this commodity to attract advertisers, and how deftly the company can handle privacy concerns raised by its users and government regulators worldwide.

As the biggest offering of a social networking company, the sale is the clearest evidence yet that investors believe there is a lot of money to be made from the social Web. Facebook's dominance in this field has left Google, a Web king from an earlier era -- less than a decade ago -- racing to catch up.

Facebook is considered so valuable because it is more than the sum of its users. More than the world's largest social network, it is a fast-churning data machine that captures and processes every click and interaction on its platform.

Every time a person shares a link, listens to a song, clicks on one of Facebook's ubiquitous "like" buttons, or changes a relationship status to "engaged," a morsel of data is added to Facebook's vast library. It is a siren to advertisers hoping to leverage that information to match their ads with the right audience.

Barring an unforeseen event, the Internet giant plans to list a preliminary fund-raising goal of $5 billion, according to people briefed on the matter, smaller than some previous estimates of the offering. But it is essentially a placeholder, a starting point used by companies to generate interest among potential investors. The eventual offering is expected to be the largest for an Internet company, bigger than Google's in 2004 or Netscape's nearly a decade before that. Trading of the stock is expected to begin by late May, the people briefed on the matter said.

In recent months, Wall Street's banks have competed fiercely for a top assignment in Facebook's offering, a coup that comes with millions in fees and valuable bragging rights. The company has hired Morgan Stanley to serve as its top underwriter, while J.P.Morgan and Goldman Sachs will also be co-leads on the deal, according to people with knowledge of the matter who did not want to be identified because the discussions were private.

The offering will compel Mark Zuckerberg, Facebook's 27-year-old founder and chief executive, to do what he has until now preferred to avoid: share information about his company.

Facebook, created in 2004 in Mr. Zuckerberg's dorm room at Harvard, grew from being a quirky site for college students into a remarkably popular platform that is used to sell cars and movies, win over voters in presidential elections and organize protest movements. It jumped from 50 million users in 2007 to 800 million in 2011, according to company figures. It offers advertisers a global platform, with three-fourths of its users outside the United States; the notable exception is China, where Facebook does not operate.

Facebook's offering is "an American milestone," said Lawrence H. Summers, the former Treasury secretary, who has been a mentor to Sheryl Sandberg, Facebook's chief operating officer, and knows Mr. Zuckerberg. "Many companies provide products that let people do things they've done before in better ways. Most important companies, like Ford in its day or I.B.M. in its, are those that open up whole new capabilities and permit whole new connections. Facebook is such a company."

Facebook has deftly kept more and more users on its site for hours every day. Its users can stream music, read the news, play virtual games, check horoscopes or upload family pictures -- all without leaving Facebook's orbit. They reveal to the company not only their names (Facebook prohibits pseudonyms) and hometowns, but also their friends and family members and their tastes on everything from pop music to politics.

Facebook offers advertisers a giant basket of information so they can find precisely the audience they covet: a Boston woman who posts that she is "engaged" may be offered an ad for a wedding photographer on her Facebook page, while a Bombay bride-to-be might see ads for wedding saris. Similarly, every press of a "like" button on Facebook signals a consumer's preferences and shapes the ads that are shown. The Facebook Connect service allows users to log into millions of sites using their Facebook username and password -- and it can report back about their activity on those sites, amassing even more data for Facebook's trove.

That this business -- a monster tangle of digital connections -- could become a global corporate colossus in less than a decade is a testament to the explosive growth of the social Web. The stock offering will come as Facebook's peers, Google and Amazon, have disappointed investors in their latest quarters with sales growth shy of expectations.

"Fifteen years ago, AOL was the Internet to most people, five years ago it was Google, now Facebook is the Internet," said Lise Buyer, a former Google executive who helped guide the company's initial public offering in 2004. "Facebook's I.P.O. will prove that there is an enormous amount of money to be made in the social media space."

Led by Mr. Zuckerberg, Facebook has been trying to hang on to its start-up spirit, even as it takes its place among Silicon Valley's elite. In Menlo Park, Calif., its new headquarters, employees have wrapped the walls with graffiti splatter art. Exposed pipes and air ducts line the ceilings and below, scuffed gray floors resemble a modified racetrack with white lines.

Facebook's biggest stumbling block has been privacy. It has repeatedly alienated users over privacy -- as in the case of the 2007 controversy over Beacon, a tool that automatically posted on Facebook what its users did or bought on other sites. It has also faced lawsuits over the use of its members' "like" endorsements in ads and drawn scrutiny for a facial recognition feature.

The company announced a settlement agreement in November with the Federal Trade Commission, which accused the company of having deceived its customers about privacy settings. And the pressure from regulators is likely to grow. Facebook now faces potential rules on privacy in Europe, along with slow-moving privacy legislation in Washington.
The company's flubs in this area reveal a fundamental tension in the way sophisticated ad-supported sites work. Consumers' time and information are effectively the price they pay for free Web services. Facebook allows its users to keep up with far-flung friends and family, for instance, in exchange for that information. Google allows anyone to search for anything, so long as the company can serve up ads based on those searches.

At the moment, the battle is on between those two models of making money from online advertising. If Google's search engine cast the Internet as an instrument of solitary exploration, Facebook requires its users to share what they do with their Facebook "friends." In some ways, the Facebook offering is a test of how valuable the social model of the Internet could be.

According to comScore, a market research firm, Facebook has become the largest platform for display advertising on the Web in the United States; 28 percent of all display ads come to Facebook, followed by Yahoo, which gets less than half that share.

While advertising is its bread and butter, Facebook has sought new sources of income by becoming a place where goods and services are bought and sold, whether it is virtual farm animals or real concert tickets.

Analysts expect Facebook to be the driver of more such transactions, using the persuasive power of Facebook "friends." Company officials use the word "frictionless" to signal that whatever you watch, read, listen to or buy on Facebook or its partner sites can be displayed automatically for the friends of your choosing.

Chris Cox, the company's vice president of product, said in a recent interview that this information hoard was both a blessing and a curse for the company. "The challenge of the information age is what to do with it," he said.

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