Should We Care About the Price of Facebook Stock?

I have used Facebook since 2005. I was in 8th grade at the time and I remember thinking that I was so cool for having a profile on a website for college kids. By the start of 9th grade, nearly every kid at my high school was on Facebook. Teachers even began to sign up.

Since, I was in elementary school, I owned a computer and frequently surfed the Internet. I mostly used it for downloading music-- first with Napster, then Morpheus, Kazaa, iMesh, etc.-- and chatting with friends. I also spent a lot of time on Ebaum's World and video game sites.

However, it wasn't until I got a Facebook that I developed a sense of what the internet actually was. Before 2005, time spent on the Internet was not much different than time spent watching television. Although I "actively" searched the web for whatever interested me at the time, I only "passively" consumed this information. In other words, watching a video on Ebaum's world or chatting with a friend online only affected me (and maybe one other person on my AIM "Buddy List"). For me, there was no legitimate sense of community. When I signed up for Facebook, I began to understand the essence of the Internet.

I will acknowledge the fact that many other online communities existed well before the conception of Facebook. You can check out Jonathan Zittrain's book The Future of the Internet-- And How to Stop It to learn more about the evolution of online interactions. AOL was my first online community. I also used MySpace for a very brief period. But these pale in comparison to Facebook and its behemoth of a (free) website. Facebook effectively transformed the Internet by providing each user with a "home base."Instead of connecting to AOL, searching with Google, or visiting Buddy Profiles on AIM, users found that they could log-in to their Facebook pages to check and see if any of their friends had sent them something interesting, like a newspaper article, a video, an inside joke, etc.

Facebook, during its early days, reminds me a lot of "homeroom." In middle school, students were assigned a homeroom teacher/advisor who took attendance, read announcements, and help us with any problems we may have. Most of the time was spent talking to our friends or doing last minute homework. On occasions, we would plan parties to celebrate birthdays, holidays, and other events. They usually weren't much-- chicken biscuits from Chick-fil-a, fun-fetti cupcakes-- but they made the school day more enjoyable.

Facebook functioned very similarly to this until 2008, when it released the Facebook chat. Up until this point, Facebook would only make small changes to the website because it was content with the look and feel, and it respected its users enough to refrain from doing anything drastic. There were some significant changes before 2008-- the Newsfeed and Home Page was created in 2006; but to me, the Facebook Chat changed the game. Rather than functioning as a sort of de facto "homeroom" for Internet users, it became the Student Lounge and the Cafeteria. Facebook chat allowed users to privately connect with their ever-growing list of friends in real time. It made chatting personal, easy, fun. Much more so than AOL group chatrooms or AIM Instant Messaging. You didn't have to remember someone's esoteric username or email address. You didn't have to publish something publically. You didn't even have to lift a finger to call that person. The addition of Facebook chat transformed the company into a constant-- a place that will exist forever. It went from being another "cool" spot to hang out online to being the best and most convenient spot to hang out. It also gave users a sense that they have control of their online presence.

As Facebook institutes more tweaks and changes to the website, it holds the title of world's most popular website-- perhaps of all time. An article from the San Francisco Chronicle found that Facebook will reach 1 Billion users within the next few days. That is insane. Unbelievable. It seems that everyone now has a Facebook. An article from Forbes even says that people who do not have Facebook profiles come across as "suspicious." The website has become the virtual Forum Magnum. People don't just use Facebook to connect and chit chat anymore. They play games, read the news, discuss politics, find work, listen to music, buy clothes, and express their individuality.

Admittedly, there are many people who are still wary of the site. One of my best friends still refuses to sign up despite my enthusiastic pleas. He, along with many others around the world, feel that Facebook is too public. "You can't control what other people post about you" goes a common saying. Some dislike the idea that companies can use your public information to advertise products to you. Still others feel that Facebook is "annoying to constantly check" and it takes away from time that you could spend with others.

These are all legitimate concerns. But I do not think any of them are unique to Facebook itself. Rather, these have been discussed since the birth of the Internet. Even the early personal computers like the Macintosh, Apple II, or the IBM 5150 were thought to be but slightly useful distractions. So were cell phones. Then smartphones. Then tablets (though I think the jury is still out on their utility). In my opinion, we can discuss these aforementioned issues until we are blue in the face and gasping for air; but at the end of the day, it comes down to personal preference: the type and amount of information you are confortable with publishing online and the use of that information by others.

However, now that Facebook is publicly traded on the NASDAQ, an new list of concerns has emerged in the minds of an entirely different group of people. Business men and women, members of the media, political pundits, and even government officials have become more and more interested in the performance of the company since its IPO last May. Clearly, this is to be expected after any company goes public. Nevertheless, the attention that Facebook receives on a daily basis is unprecedented and has, in my opinion, shifted the conversation away from privacy issues and user-related tweaks, towards company earnings, chart readings, and other valuation mechanisms used by stock traders. It even raised questions about high-tech trading software on its first day as a public company.

I understand that public companies have a duty to shareholders to make profits and engender growth and that media and traders are just using the tools available to asses the value of and make predictions about Facebook. I get that. But, I just don't think they fully understand Facebook or the value of its stock. What they do not realize is that Facebook, as designed and lead by Mark Zuckerberg, is not a "normal" or "regular" company. It does not seek to maximize profits or to please shareholders. It does not cater to the needs of its clients (advertisers). It does not derive value from revenue. The reason: because it can't.

Facebook has one purpose: to connect. If it is not able to connect its users with whatever it is they want, it will fail.

As I previously mentioned, Facebook is looking at nearly 1 Billion members. Each member has his/her own profile, friend list, public wall and private inbox, ready for customization. Each of these people joined Facebook to connect with someone else. After using the site for just a little bit, each person finds that Facebook, in fact, connects them with more people, more interesting things. A profile is more than a photograph and personal information. It is a symbiotic relationship between the user and his community. The user provides information and records activity on the site to give life to a cyber-community. Each cyber-community is unique to that individual but overlaps and connects with other users. The more we use the site and connect with our friends and share our interests, the better the site functions and the more value it earns. Since 2003, this system has grown and evolved into an incredible website and massive public company.

For a while, its value depended solely upon what the users themselves thought. Because each user's experience was unique and individualized, the company focused on making that experience the best it could be. Even as it became a highly profitable company, driven by advertising, Zuckerberg and the rest of the company kept the focus on the individual, refusing to change the interface to boost advertisements and, therefore, revenue. But there was one problem with this method of valuation: the site was free. The supply was free and the site functioned beautifully, so the demand continually increased.

How did that work?

More and more people joined the site, attracting more and more companies to purchase advertisements, leading to more profits for the company and better improvements to the website.

After the IPO, however, this cycle changed. The business community, the media, and Zuckerberg himself believed that Facebook was a mature, profitable Internet company like Amazon or Ebay, ready to capitalize (literally and figuratively) on its success by going public. The thinking went something like this: Because Zuckerberg had run such a great company with millions of members and dollars in advertising revenue, an initial public offering would provide him and the company with access to millions of dollars in capital. As a result, many believed, that they could continue to make improvements to the site as a way to bolster earnings. The central (but misguided) assumption was that people would just continue to join the site, which would only reinforce the company's success and value.

This has turned out to be wrong, and indeed problematic for Zuckerberg and his company. After an IPO of about $28 dollars per share, and a peak valuation of $104 Billion ($38/share), the share price has stumbled to just $19.41 in just 3 months. Everyday on CNBC, Fox News, and CNN, some market analyst or business journalist talks about its earnings reports and growth model, saying that it was overvalued and that it lacks a strong foundation for long term profitability. Other, less intelligent pundits, cite Facebook's fall as a symptom of the bad economy. I've even heard people blame Obama.

Although I agree that Facebook was probably initially overpriced, I think the other claims are nonsense. As I stated before, members of the media and the business community do not understand what Facebook is and why it has become so popular. They do not understand that its value stems not from earnings but from its ability to connect and its users' perception of that ability. Most importantly, they do not understand the vision that Zuckerberg has for his website. Zuckerberg wants Facebook to be cool, to be in style, to be used in the best. most innovative ways. Just like the Internet itself. Both the Internet and Facebook were not created for profits, but to connect us to each other, to information, to our favorite things. At the same time, both of them have come to rely on advertising and, thus, profits to continue to exist. Yet, ultimately, their true value depends upon their reliability and functionality in the eyes of its users. Now that Facebook operates as a public company, its economic value has failed the meet the expectations of the business community while its social value has continued to increase. Regardless of its economic value, its presence in our lives will remain constant as long as Zuckerberg and his team can innovate and make the user experience better. But if the focus shifts to the stock price and its quarterly earnings, it is toast.