October 9, 2007

This fillip may sounds like a religious tract but really asks how Facebook can justify a valuation which, to hear one of its investors, hovers between eight and ten billions of US dollars. Indeed Facebook has of late become a media darling and my readers are entitled to wonder what is afoot.

Kevin Allison and Richard Waters recently filed an impeccable analysis (*). In particular they highlight the two major steps which has allowed what started as a social network for students to unlock its value. First you open yourself to all comers, a step Facebook took a year ago. Second you open yourself to all developers, a bolder step taken six months ago. But is it enough?

Issues have been raised from different quarters. The first, as expressed by Alice Mathias (**), is to remind us that Facebook remains rooted at the college level. The resulting silliness factor creates a discount relative to face value. But can Facebook risk alienating its natural pool of new users by becoming too straight-laced?

Some students may be silly but some grown-ups are downright sinners. Anne Barnard filed a report (***) about an investigation launched by the New York Attorney General on how safe Facebook users are from "adult sexual predators". "Do no evil" is no doubt as much Mark Zuckerberg's motto as it is Google's founders'. Nevertheless it is inherently costlier to police a social network than a search engine. Whether it affects one's reputation or one's pocketbook, it knocks down value.

For Brad Stone (****), the figures just do not add up. Advertising is the obvious source of revenues. It should drive both the valuation of Facebook and of the applications it hosts but faces significant restrictions in view of site policies. Which leads us back to Kevin Allison and Richard Waters' open question. Can current valuation be justified unless Facebook deploys "a system that would allow advertisers to target ads based on information that users reveal among themselves on the site"?

If personalized advertising is to bring salvation to Facebook, privacy stands in its way. So I have not strayed from the narrow path of my fillips after all. As a popular social site, Facebook is no stranger to privacy issues. Employees may use it to badmouth their companies, as David Bowen reports (****), while company bosses insist on befriending their underlings, as one complained to Lucy Kellaway (*****). Questionable behavior by Facebook users is one thing though. Coming from Facebook itself, it would be a radical breach of faith. It would turn users to prey.

In Mr Zuckerberg's shoes, I would wait to see how the European Commission is going to rule on Google's acquisition of DoubleClick (1). We already know how much a Google can be tempted. A Munich on Privacy from the European Commission would signal it is safe to act. But were Mr Zuckerberg in my shoes, he would know that he does not have to be framed into a trade-off between user privacy and shareholder expectations. If Facebook renounces to be both a social network and an advertising system, it can still reap the benefits of personalized advertising and preserve the privacy of its users. ePrio technology provides the answer.

Let us pray that in the future Facebook may not lose face.

Philippe Coueignoux

• (*) ............ Route to social success, by Kevin Allison and Richard Waters (Financial Times) - September 11, 2007
• (**) .......... The Fakebook Generation, by Alice Mathias (New-York Times) - October 6, 2007
• (***) ........ New York Investigating Facebook's Safety Rules, by Anne Barnard (New-York Times) - September 25, 2007
• (****) ..... In Facebook, Investing In a Theory, by Brad Stone (New-York Times) - October 4, 2007
• (****) ..... You can't stop them talking, by David Bowen (Financial Times) - October 3, 2007
• (*****) .. My boss wants to be my friend on Facebook, by Lucy Kellaway (Financial Times) - October 3, 2007
• (1) see call for observations by the EU Commission Directorate-General for Competition