4 Reasons (You May Not Have Thought Of) Why Facebook’s IPO Valuation is Low – PART TWO

(Continued from yesterday)

3. Facebook is about Facebook. Facebook’s management knows all of the stuff I’ve already mentioned. And best I can tell, they’ve managed to subordinate everything else to making their product excellent. By excellent I don’t mean perfect or without flaws – I mean consistently delivering real value to users, which means they keep using it and spreading it to more people, which in turn increases its value.

From what I understand, Zuckerberg is and always has been a product guy. His most noteworthy achievement, in my view, was to insist that product comes first and that company, business model, and investor expectations come later. (His second most noteworthy achievement was finding resources that trusted – and funded – his ability to do so, but that’s another topic.) Here’s a short list of other companies that have also done what Zuckerberg has done: Google. Amazon. Apple. They weren’t without competitors or mis-steps, but each one built a product that people wanted, and did so really, really well – letting other priorities be second place.

I’ve read some comments about how Facebook hasn’t proved it can really advertise to its users yet, or that if it tries it might detract from the value so many of us get from it. That SO misses the point. First of all, measuring Facebook’s revenue potential as if the only form of value is the number of banner ads or clickthroughs it gets shows a shocking lack of imagination (although for the purposes of reaching the IPO market it needs to phrase its appeal as if that matters). But second, expecting a company sitting on top of a humanity-changing paradigm to know what form monetization will ultimately take is like expecting it to be God. Zuckerberg is not God. But he is a product guy committed to improving his product iteratively based on how its users actually react. Say what you will about him personally, his own ego takes a back seat to what works. From what I understand, Zuckerberg will stay in charge after the IPO – and as long as that remains true the company will continue to improve. Sell your stock when he retires.

4. The least interesting thing about Facebook is Facebook. I heard a question today about whether in ten years (or two) we’ll all still be logging on to Facebook to share stories on our walls. Again, SO not the point. Facebook is a platform, not a service. Put another way, it’s becoming a social operating system.

Having spent ten years in the unglamorous but necessary website hosting industry, I can unequivocally state that the interfaces people use to interact with their  technology resources are the least important element of a platform company. First of all, the state of the art in web interfaces is fluid and always changing – it is a truism in the web world that no interface is ever “done” and those that stop changing eventually die. Is your email interface the same as it was in 1993? Did the fact that it changed make email irrelevant?

Second, who the hell knows what form we’ll want to use to interact with each other socially? The answer to that is limited only by human imagination – and by the time you’ve finished reading this there will be another ten answers to that question. This observation extends to interaction paradigms (like “walls” and “chat” and “timelines” – and even “Instagram”). These are merely waystations on the journey, and (while important to get right) should be regarded with as much importance as the paintjob on a Ferrari: pretty, but ultimately cosmetic compared with what’s under the hood.

Here are three things about what’s under Facebook’s hood that matter more than the interface du jour:

  • Universal Identity Management. Surely we’ve all noticed the preponderance of Facebook registration and authentication in applications and services having nothing to do with Facebook. The more people who use Facebook, the more compelling it is for third parties to rely on it for user management. Facebook in many ways is the holy grail of web identity: one password, one place to maintain your profile, connected to everything. After this goes on for a few more years, we will no longer be able to imagine a web without “Log In With Facebook” than we could a web without credit cards. Not only does this represent a revenue opportunity for the company, but the information for the rest of the online world about who is using your application – and by extension who they know that might use your application – has enormous value.
  • APIs, APIs, APIs. While Facebook has taken some (rather ineffectual) heat for doing so, the willingness it has shown to open up its data for strategic use by the rest of us is making it into a necessity for things as fundamental as communications, usage tracking, and social credibility. Google has gained ubiquity using largely the same strategy – what would the web be like without the GoogleMaps API, or AdSense, or any number of others? The array of products and services that could be developed  by integrating with the information embedded in Facebook’s infrastructure is stunning.
  • The Graph Itself. Underneath all of this is the data of who connects with whom, and why. Those of us using Facebook voluntarily – happily – keep this store of information constantly updated in real time (and we will increasingly do so as applications update Facebook in the background as we use them). The company has only just begun to tap into the opportunity this represents: not just traffic, but traffic tied to people. Imagine a service showing the realtime profile of an audience watching a live sporting event, or a minute-by-minute report of a brand’s product launch as it moves through social channels, complete with geographic/demographic/psychographic data down to the individual level. This could all be done without compromising individual privacy concerns, and the wisdom gained from the output is unprecedented-in-human-history. And Facebook owns this.

Marc Andreesen (and many others) have been lauded for observing that “the browser is the operating system,” (the ChromeBook is the latest manifestation of this principle), but Facebook takes that one step further. It’s not an OS like Windows, or even like Chrome. It’s an operating system for the next layer of the stack: how we use the web. As we approach Kurzweil’s singularity, we may have to look at Facebook not just as a great company and wealth generator, but as the first glimmers of an operating system for the human race.

Bottom line? Buy the stock. But even if the company falters, the transcendent possibilities Facebook revealed to us will be its real legacy.

Michael Sattler

With a career spent in founding and technical leadership roles with new and enterprise-level organizations, Michael Sattler is a veteran in technology strategy, operations, and product management. He’s spent decades in B2B and B2C SaaS product development, software and application design, engineering operations, new venture creation, and innovation practices.

He has scaled and managed technical teams from 2-50+ across three continents, led large-scale cross-functional program management, and founded or co-founded six companies.