Breakout

3 Ways Facebook Plans to Exploit Users

Jeff Macke
Breakout

In a move hitting the front page of nearly every newspaper in the world, social networking giant Facebook took the first steps toward an initial public offering (IPO) yesterday by filing what's called an S-1 form with the Securities and Exchange Commission.

But folks desperate to buy shares still have to wait at least another three months until before see the company debut on a stock exchange under ticker symbol (FB).

So why all the fuss? Because despite all we think we know about a company that counts a membership equal to more than 10% of the earth's population, Facebook's filing was the first chance for outsiders to see the different ways FB profits from users. A careful read of the S-1 reveals Facebook's plans to make even more money from members using the free service to connect with old friends.

Earlier today my co-host Matt Nesto and I discussed 3 ways Facebook plans to exploit you the user, in order to justify their plans to increase revenues, profit, and valuation. The list may disturb you.

1. Facebook is going to "sell" users for $120 each

According to their filing, Facebook had 850 million Monthly Active Users (MAU) at the end of 2011. From that user base the company generated roughly $3.7b in revenue, or just under $4.50 for every member. Nearly 90% of this number comes from selling your information to advertisers who, in turn, try to sell you things Facebook says you want.

That may seem like a reasonable trade until we get to the IPO. "If this thing goes public at the price they're expecting (Facebook) will get $120 per user," Matt Nesto notes. Said another way, Facebook is going to sell you for 120 bucks. Wall Street bankers will get a cut of this figure, with Facebook getting the bulk of the money. FB users get nothing.

2. Facebook users are about to become billboards

In the first line of a 2,000 word letter from Mark Zuckerberg, the Facebook founder announces the following: "Facebook was not originally created to be a company. It was built to accomplish a social mission — to make the world more open and connected."

Noble stuff from a guy about to be worth nearly $30 billion. Regardless of the original inspiration, once Facebook goes public Zuckerberg's job is to create value for shareholders. That means getting more than $4.50 a year for selling each user's information to advertisers. One of the ways Facebook is going to go about this value extraction is turning your every click into a sponsorship.

If you feel exploited now you ain't seen nothing yet. Post-IPO, everything you "Like", suggest or link is going to be packaged and sold. Anyone you "Friend" will be pitched stuff you like. People with whom you have common friends will be sold goods on the basis of your unwitting recommendation. You won't just be connecting with people anymore, you'll be infecting them with spam, pop-ups, and network.

If that sounds something like a social disease it's because that's exactly what it is.

3. The IPO is as much a Public Relations coup as a Share offering

Typically when a company goes public it gives the shareholders something in return. Under normal circumstances that means management giving up some degree of control, either in the form of voting rights or via an independent board of directors charged with looking out for shareholder interests. At least that's the basic idea.

In the case of Facebook, the company is surrendering nothing. Zuckerberg will retain control of the company both in matters of day-to-day business as well as anything requiring a shareholder vote (buyouts, mergers etc). Should Zuckerberg become incapacitated his controlling interest will pass "to a person or entity he designates as his successor." Mark Zuckerberg could bequeath control of Facebook to his dog, Beast, and there isn't thing one shareholders could do about it.

Regardless of the company line about enhancing user experiences and fostering openness, the Facebook IPO will result in more ads and exploitation of user information. The shares may go up or down upon issuance but that's almost an afterthought. Buyers of the stock are simply cashing out VC's and funding the exploitation of whatever information they and their friends choose to share.

Like it or not your Facebook experience is about to change in a way that makes more money for the company. It's not a reason to avoid the shares, just a reason to be realistic about any idea of Facebook having a lofty mission.

Is Facebook selling out by going public? Let us know what you think in the comment space below; I personally promise not to sell your observations to the highest bidder.

Please answer our poll question below: Will you buy shares of Facebook within the first six months after it goes public?

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