Speaker 1: Brought to you by the reinvented two thousand twelve Camray.
Speaker 1: It's ready. Are you get in touch with technology? With
Speaker 1: tech Stuff from how stuff works dot com. Well, hello there,
Speaker 1: and welcome to tech Stuff. My name is Chris Pollette,
Speaker 1: and I'm an editor at how stuff works dot com.
Speaker 1: And sitting across from me, as he typically does, is
Speaker 1: senior writer Jonathan stricklandt Mike here hu hut, Mike. I
Speaker 1: don't know what possessed you to introduce the show that way,
Speaker 1: but hey, guys, I don't know a little bit of
Speaker 1: a mellow Friday. I guess let's take it down to
Speaker 1: not actually one of the thing that we're going to
Speaker 1: talk about today could be a little slow and you know,
Speaker 1: in places for some people. But I think we're going
Speaker 1: to try to make some sense out of it. Yeah,
Speaker 1: that's try is the operative word here, all right. So
Speaker 1: we already talked about Facebook and the fact that it
Speaker 1: was going to hold an I p O and initial
Speaker 1: public offering. Basically they're going to in the past when
Speaker 1: we were talking about this, they're going to put out
Speaker 1: stock so that people can buy shares in the company.
Speaker 1: And they were actually to some degree forced to do,
Speaker 1: so they reached a certain size for a certain length
Speaker 1: of time, and basically there was a responsibility that they
Speaker 1: had to take themselves public, going from private company to
Speaker 1: public company. And then uh, in May they made their
Speaker 1: initial public offering and billions of dollars. Yeah, it's actually
Speaker 1: we should probably talk a little bit about that. Excuse me.
Speaker 1: So the I p O goes out and on May
Speaker 1: sev Facebook ends up raising about sixteen billion dollars in
Speaker 1: in uh the first day there. That's that's how much
Speaker 1: they made in their I p O. But the interesting
Speaker 1: there are several interesting things about this. One is that
Speaker 1: the opening price for a share of Facebook stock was
Speaker 1: thirty eight dollars, right, but which actually, from why understand,
Speaker 1: been adjusted down slightly from what it was originally going
Speaker 1: to be. Yeah, And and what happens is, um, don't
Speaker 1: ask me to explain the stock market to you, um,
Speaker 1: But in general, what happens is they set sort of
Speaker 1: a range of prices what they expect to launch at.
Speaker 1: And it has to do in part with the the
Speaker 1: valuation of the company, what investors think the company is worth,
Speaker 1: and also what you know, how the company has been
Speaker 1: performing recently. So that and that's going to play a
Speaker 1: really big role in our discussion here. Yeah, I thought
Speaker 1: it was worth about fifteen cents, but they shouted me
Speaker 1: down on that, right, So they said thirty eight dollars
Speaker 1: per share, which, by the number of shares that were
Speaker 1: out going to be available on this initial public offering,
Speaker 1: would have put the value of Facebook and about one
Speaker 1: hundred and four billion dollars. So yeah, if you if
Speaker 1: you sell it for scrap, that's what they felt like
Speaker 1: it was going to be working, right essentially, So that's
Speaker 1: I mean, that's a huge, huge amount of money and
Speaker 1: in fact was going to make Facebook, in fact did
Speaker 1: make Facebook the biggest tech I p O in history,
Speaker 1: not the biggest I PO in history, but the biggest
Speaker 1: one for a tech company for now. For now. Yeah,
Speaker 1: the records were made to be broken, right, but the
Speaker 1: entire thing has kind of spiraled into this semi scandalous
Speaker 1: uh story. Yea, and scandal depending upon your own perspective,
Speaker 1: because it may very well be that even if things
Speaker 1: that you might think unethical happened, if even if the
Speaker 1: actions you think are unethical, even if those did happen,
Speaker 1: it may very well be that those unethical actions are
Speaker 1: not in themselves illegal us as a caveat for our
Speaker 1: the conversation that has taken place so far and and
Speaker 1: is to come. Um. As of the date we're recording
Speaker 1: this in May, Facebook stock has been out on the
Speaker 1: market for approximately one week. It was actually we record
Speaker 1: on Friday, so it was done the thursday before. Uh
Speaker 1: so it's been one week in a day. So um.
Speaker 1: A lot of this material that we that that we
Speaker 1: will be talking about is stuff that came out this week. UM,
Speaker 1: So we record in advance, so they're they're probably if
Speaker 1: you're going what everybody knows about this, you know and
Speaker 1: how far it goes, Well, it's gonna bee that came
Speaker 1: out after we recorded this, so we wanted to talk
Speaker 1: about it because it's it's weird. We're recording it specifically
Speaker 1: on MA and UM on. The closing price of Facebook
Speaker 1: stock on May was thirty two point o six, so
Speaker 1: it dropped from thirty eight to thirty two, and some
Speaker 1: analysts think that that's not going to be that's not
Speaker 1: gonna be the end of it. Then in fact, Facebook
Speaker 1: stock could fall as far down as twenty two dollars
Speaker 1: a share by November, which would be a dramatic would
Speaker 1: be a decrease in value, which in in investment terms
Speaker 1: is what we usually call a bad thing, assuming that
Speaker 1: you're actually buying stock in Facebook. We'll talk about some
Speaker 1: of the other elements here too. So here here's something.
Speaker 1: There were several things that were strange about the the
Speaker 1: first day of trading for Facebook. Thing number one. So
Speaker 1: Facebook stock trades on in the US on NASDAC, the
Speaker 1: NASDAC Stock exchange for a couple of different stock exchanges,
Speaker 1: NASADA is one of them. Yeah, And then a stock
Speaker 1: exchange is basically a place where representatives by and sell
Speaker 1: shares of stock. So if you work through an investor,
Speaker 1: uh and put in in order, the investor will talk
Speaker 1: to the representatives on the trading floor and they put
Speaker 1: in the order for you. Um, and the stock prices
Speaker 1: change in the blink of an eye so times less.
Speaker 1: So you know, you you say, hey, I want to
Speaker 1: buy um, let's say it it I p O is
Speaker 1: at thirty eight dollars And you say, well, I'm not
Speaker 1: going to hit it right away. I want I want
Speaker 1: to buy fifty shares of Facebook immediately, and then you'll
Speaker 1: you'll get it at whatever price it is. Then um,
Speaker 1: you might say oh, well, I want to when it
Speaker 1: hits forty dollars or less. Then you know if it
Speaker 1: if it goes up to forty, you've missed your shot
Speaker 1: until it drops back down. So the the exchanges where
Speaker 1: they make trades and things like that happen, and just
Speaker 1: like that they make trades happen, we should we should
Speaker 1: also mention that in in and investing their multiple strategies.
Speaker 1: So you've got people who are like day traders, who
Speaker 1: are looking for the really short term turnaround, like they
Speaker 1: like high volume, high volatility. That's what day traders thrive
Speaker 1: on because they're trying to make lots of money and
Speaker 1: as little time as possible, which is kind of like betting. Yeah,
Speaker 1: it's like gambling. So you're you're betting that a stock
Speaker 1: price is going to fall or going to rise in
Speaker 1: a certain amount of time, and you're trying to make
Speaker 1: money off of that. Then there's the long term investment
Speaker 1: where you're thinking, no, I'm buying shares in this because
Speaker 1: I believe in this company. I believe that this company
Speaker 1: ultimately is going to uh to succeed over the next
Speaker 1: several years. And so this is a true investment in
Speaker 1: the company, and that I will get a return on
Speaker 1: that investment. Perhaps I'll actually get paid out returns on
Speaker 1: my on my investment dividends exactly instead of looking just
Speaker 1: to buy and sell. So anyway, on that day, on
Speaker 1: May sevente what what was typically happens on a trading
Speaker 1: day is that the stock market, the Nasdaq Stock Exchange
Speaker 1: begins trading at nine thirty in the morning, however Eastern
Speaker 1: Standard time Eastern Stanard time. However, for I p o
Speaker 1: s for initial public offerings, those trading UH shares usually
Speaker 1: don't pick up until an hour after the market opens
Speaker 1: at least, so you usually have about an hour or
Speaker 1: maybe a little bit longer of grace time between when
Speaker 1: the market opens and when an I p O actually
Speaker 1: begins its initial trading. So NASDAC had planned on the
Speaker 1: Facebook shares starting to go on trade on the floor
Speaker 1: at around eleven o five in the morning. But eleven
Speaker 1: in the morning comes and goes, and no shares are
Speaker 1: being traded, and this already kind of got some potential
Speaker 1: investors a little worried, like what is going on? And
Speaker 1: then uh, they finally started to go started to trade
Speaker 1: at around eleven thirty in the morning. And the reason
Speaker 1: for the delay or one of the reasons for the delay.
Speaker 1: First of all, Nasdac says the reason for the delay
Speaker 1: was a technical glitch, but one of the one of
Speaker 1: the and there were there were several things that fell
Speaker 1: out over that, and it's still as of the recruiting
Speaker 1: of this podcast, it's still unfolding. But one of the
Speaker 1: possible reasons for the delay is that a lot of
Speaker 1: significant number of shares, or rather a significant number of
Speaker 1: shares switched what was going to happen before trading started.
Speaker 1: So in other words, before trading starts, you usually have
Speaker 1: sellers who who express an interest in selling a certain
Speaker 1: amount of stock and buyers who say they want to
Speaker 1: buy a certain amount of stock. And as that goes
Speaker 1: and tries to match up the buyers with the sellers
Speaker 1: so that its smoothly begins as soon as the trading opens.
Speaker 1: Because there are a certain number of shares of stock,
Speaker 1: it doesn't continually just make new shares. I mean there's
Speaker 1: there's you know, because there's a limit to the number.
Speaker 1: You if you can't have more shares being bought then sold,
Speaker 1: h but you can't have more shares sold than But
Speaker 1: that's what turned out to be the case, what happened
Speaker 1: was a lot more of the initial investors in Facebook
Speaker 1: seemed to want to sell shares then had originally been
Speaker 1: UM been planned for. So so, in other words, a
Speaker 1: lot of companies, really banks things like that that had
Speaker 1: a significant interest in Facebook wanted to dump that stock
Speaker 1: faster than what NASDAK had planned for because something had
Speaker 1: changed before trading began. Yeah, and it's important to note
Speaker 1: too that you may say, well, if they didn't trade
Speaker 1: until thirty, how did they get that? Well, UM, and
Speaker 1: the cases of of I p O s like this UM,
Speaker 1: people who are involved in the company, say co founder
Speaker 1: and CEO Mark Zuckerberg, people who are involved with the
Speaker 1: company have a certain amount of stock that they are
Speaker 1: granted as a you know, hey, you have a thousand
Speaker 1: shares of stock for working for us. As soon as
Speaker 1: it starts trading, you will be given the option to
Speaker 1: you know, to have that stock, to own that stock
Speaker 1: right there reserved for you. So these investors already have
Speaker 1: a certain part of the company, and so they are
Speaker 1: granted an equivalent amount of you know, stock that as
Speaker 1: soon as the stock market starts trading, they can sell
Speaker 1: that if they want to. So they didn't have to
Speaker 1: go buy it and then sell it again, so just
Speaker 1: if you were wondering where that came from. So they
Speaker 1: already had a share. Within the first thirty seconds of trading,
Speaker 1: eighty million shares changed hands. That's a lot. That's a
Speaker 1: lot of that's a lot of shares. And then, uh,
Speaker 1: there were several other problems that cropped up um after
Speaker 1: this technical glitch thing. One of them was that some
Speaker 1: traders were reporting that they were getting delays when they
Speaker 1: were putting in orders, so they weren't really sure if
Speaker 1: the shares that they had had transferred over or if
Speaker 1: they were buying a share, they weren't really sure whether
Speaker 1: or not they possessed it at this point because they
Speaker 1: were getting delays in the system. And on top of that,
Speaker 1: um there were other issues, uh, not just not just
Speaker 1: the delays, but that traders were saying that they were
Speaker 1: getting charged a higher price than what they had expected
Speaker 1: based upon when they made their purchase. These are both
Speaker 1: really bad things in general. Now, the real scandal surrounding
Speaker 1: the Facebook I p O doesn't really involve that. I mean,
Speaker 1: that's a problem, but that's a NASDAC problem, not necessarily
Speaker 1: a Facebook problem. The scandal is about why these initial
Speaker 1: investors started to sell off shares or large companies that
Speaker 1: had the opportunity to buy up shares, why they did
Speaker 1: not rush into the market. And it's the difference between
Speaker 1: how a company like Facebook treats these major investors versus
Speaker 1: the average investor. So let's to to really explain this,
Speaker 1: it will be helpful to kind of make an analogy.
Speaker 1: Let's say that Chris is a fat Cat banker who
Speaker 1: runs fat Cat Banking Limited, sitting here, I don't know,
Speaker 1: and then I am average Joe, the investor for Facebook.
Speaker 1: I just want I want to buy a share of Facebook. Well,
Speaker 1: what seems to have happened, and this is all alleged
Speaker 1: at this point, because as of the recording of this podcast,
Speaker 1: there has not been an investigation UH and there's only
Speaker 1: been sort of some vague accusations. So I want to
Speaker 1: say that what appears to have happened based upon the allegations.
Speaker 1: What appears to have happened is that Facebook took a
Speaker 1: look at its UH last quarter results and they did
Speaker 1: not perform up to the expectations of the company, which
Speaker 1: means that Facebook was not making as much money as
Speaker 1: it had wanted to And this is something that affects
Speaker 1: the investor community because again, the value of a company
Speaker 1: and part is about how well it's doing in the marketplace. Right.
Speaker 1: The once you become public under well, you're you're governed
Speaker 1: by the laws of wherever the stock exchanges. So under
Speaker 1: American law, UM, the Securities and Exchange Commission require uh
Speaker 1: that you, as a public company, file documents with them
Speaker 1: letting them know what's going on. And that information is
Speaker 1: public knowledge. So you have to say, look, I think
Speaker 1: we're gonna sell more stuff than we've ever sold before,
Speaker 1: or you know, last quarter half of our customers ditched
Speaker 1: us and went to another provider. You have to let
Speaker 1: them know that you have to divulge. So yeah, and
Speaker 1: so this is the thing they had. You know, being private,
Speaker 1: you can keep all of that to yourself because you
Speaker 1: don't have to worry about the the investor. But um,
Speaker 1: in this case, the federal government was you know, requiring
Speaker 1: them to to make this information public. Um. And what
Speaker 1: happens in this case too is that they the big
Speaker 1: wigs in the company, are responsible for going out on
Speaker 1: what they call a road show. So they have to
Speaker 1: go out and speak to investors and tell them about
Speaker 1: the health of the company, about what they expect going forward,
Speaker 1: about their performance in the past, and all sorts of
Speaker 1: little details Mark Zuckerberg had, But Mark Zuckerberg has a
Speaker 1: mole on his left, you know, temple, and that means
Speaker 1: that we're going to be more profitable. All sorts of
Speaker 1: little details. It's not those kind of things. But give
Speaker 1: it like a high rolling ad campaign. Yeah, this is
Speaker 1: why you should invest in us. We we really think
Speaker 1: we're going to grow. This is what the forecast indicates.
Speaker 1: And but that information has to be made public under
Speaker 1: this law. So here's the thing. Apparently, according to the allegations,
Speaker 1: uh some person in the know in Facebook went to
Speaker 1: some of the largest banks that were part of handling
Speaker 1: this whole I p O system. Uh so Morgan Stanley
Speaker 1: being chief among them, and went to went to these
Speaker 1: banks and said that the last quarters financial results were
Speaker 1: poorer than expected and that would in fact affect the
Speaker 1: value of the company somewhat, Which meant that these these
Speaker 1: large institutions had enough information to know, hey, maybe we
Speaker 1: shouldn't buy up a whole bunch of Facebook stock because
Speaker 1: it could be overvalued. That thirty eight dollars per share
Speaker 1: may not really reflect the value of the company based
Speaker 1: upon these last quarter results. But Facebook did not divulge
Speaker 1: the information to the average investors. So, in other words,
Speaker 1: Chris gets a phone call and he gets a verbal
Speaker 1: message on that phone call that says, we didn't do
Speaker 1: as well as we thought we were going to do
Speaker 1: last quarter. Uh, that's probably going to affect the share price.
Speaker 1: And I thought you should know, I do not get
Speaker 1: a phone call as as average investor, you know, average Joe,
Speaker 1: the the American investor. I don't get a phone call.
Speaker 1: So when the stock goes on the floor and it
Speaker 1: opens up for trading, I jump out and I buy
Speaker 1: it at thirty eight dollars a share. Meanwhile, the multibillion
Speaker 1: dollar bank industry does not jump in because they already
Speaker 1: has the foe knowledge, knowing that that price does not
Speaker 1: truly reflect the value of the company as it stands
Speaker 1: based upon those last quarter results. The stock price for
Speaker 1: Facebook fell as low as down to thirty one dollars,
Speaker 1: and like I said at the beginning of this podcast,
Speaker 1: as of the recording of this it's currently at thirty
Speaker 1: two dollars and um in like six cents, which is
Speaker 1: significantly lower than thirty eight dollars per share, So people,
Speaker 1: the average investors were hurt by this. You know, they
Speaker 1: went out and they bought it at full price, thinking
Speaker 1: that that was a valid valuation or the company it
Speaker 1: was approved, it was ready to go and everything's cool. Meanwhile,
Speaker 1: all these companies that were in the no adjusted their
Speaker 1: figures for what Facebook's results would be and what they're
Speaker 1: projected results would be in the future and did not
Speaker 1: jump into it. So that caused a lot of people
Speaker 1: to cry foul, saying this isn't fair. Facebook. Let these
Speaker 1: big companies know, these big banks mainly no financial institutions
Speaker 1: know that things were not quite as they seemed. But
Speaker 1: they didn't let us know. And as a result, we've
Speaker 1: lost money. Uh, while we were trading in good faith.
Speaker 1: And uh, here's the thing. Facebook was allowed and I
Speaker 1: p O is allowed to give verbal information like that
Speaker 1: to major investors that there's nothing wrong with that as
Speaker 1: the law stands in the United States, and there's nothing
Speaker 1: that requires Facebook to make that aim statement in any
Speaker 1: other format to anyone else besides those investors. So based
Speaker 1: on a strict legal definition on that approach, it's you know,
Speaker 1: Facebook quote unquote did nothing wrong. Now wrong in ethical
Speaker 1: like wrong in the eyes of the law and wrong
Speaker 1: in the eyes of ethics are two different things. You know,
Speaker 1: a law does not have to necessarily be ethical just
Speaker 1: because it's just because it's not illegal, doesn't mean it's
Speaker 1: the right thing to do right right exactly, just like
Speaker 1: breaking certain laws may not break ethics, not that you
Speaker 1: should break the law. Obey the lawheads, so go to school.
Speaker 1: This has uh inspired several investors to get together and
Speaker 1: sue Facebook. As a result, there are more than one
Speaker 1: lawsuit now class action lawsuits. So it's a law of
Speaker 1: The lawsuit was filed in the U. S. District Court
Speaker 1: in Manhattan. Uh and UH, it's essentially saying that Facebook
Speaker 1: told analysts at its underwriters, which were those financial institutions,
Speaker 1: to materially lower their revenue forecasts for so that you know,
Speaker 1: that's the essentially saying the company is not going to
Speaker 1: make as much money in twelve as we originally thought
Speaker 1: we were going to, and that without letting that information
Speaker 1: go out to the public, it was running kind of
Speaker 1: a shell game and distracting us while letting us buy shares.
Speaker 1: Us being the average Joe American um buy shares at
Speaker 1: full price. I want to correct something I said. UM,
Speaker 1: they're looking, they're hoping to make a class action. They
Speaker 1: haven't yet as far as the recording of the show. UM.
Speaker 1: And also at the same time, the Massachusetts Security Division
Speaker 1: has subpoena at Morgan Stanley about the communications with clients
Speaker 1: about this UM these adjusted forecasts. So really the train
Speaker 1: of events is that, of course, if these allegations are true,
Speaker 1: If the allegations are true, what happened is Facebook executive
Speaker 1: goes and tells financial institutions, including Morgan Stanley, our forecasts
Speaker 1: for Facebook's revenues in are off. We're not gonna make them.
Speaker 1: We're not gonna make that much money. Morgan Stanley then
Speaker 1: goes and tells major investors that are customers for Morgan Stanley, Hey,
Speaker 1: Facebook is not going to make its numbers this year.
Speaker 1: The price that we're being quoted is probably not indicative
Speaker 1: of its actual value. You may not want to invest.
Speaker 1: And meanwhile, everyone else on the street is trying to
Speaker 1: get that thirty eight dollars share of thinking that Facebook
Speaker 1: shares are going to go through the roof. Now that
Speaker 1: sums up the big scandal. There's some other things that
Speaker 1: I think would be interesting to talk about that relate
Speaker 1: to Facebook going public and Facebook way Facebook generates revenue,
Speaker 1: and some of the challenges that the company faces. So
Speaker 1: let's say that the company whether's the storm and whether
Speaker 1: or not it means that they have to do a
Speaker 1: settlement of court or they win whatever. They get through this.
Speaker 1: So there's a particularly rocky I p O. But it
Speaker 1: was also a very large one, and there were other
Speaker 1: mitigating factors that kind of confused it. So they get
Speaker 1: through that, where do they go from here? That's actually
Speaker 1: a really interesting question because Facebook, according to uh to
Speaker 1: an article I read, Facebook makes around of its revenue
Speaker 1: from web advertising, So the majority of money coming into
Speaker 1: Facebook comes in through web advertising. That's uh. That's both
Speaker 1: a good and a bad thing. It's good in the
Speaker 1: sense that Facebook has an enormous customer base or enormous
Speaker 1: user base. I guess you could say, uh, nine million users.
Speaker 1: That's a lot of people, just under a billion people,
Speaker 1: probably gonna hit more than a billion before the end
Speaker 1: of Yeah, so you've got just under a billion people
Speaker 1: using your service. That's a lot of eyeballs to get
Speaker 1: to see these ads. However, the value of web advertising
Speaker 1: as a whole is in decline. And particularly on Facebook,
Speaker 1: where Facebook has tons of information about user behavior on
Speaker 1: Facebook and not that many Facebook users are actually visiting
Speaker 1: the ads that are served up on their pages, which
Speaker 1: is another one of those indicators that people actually were
Speaker 1: saying in the days before, immediately before the initial public offering,
Speaker 1: that wouldn't matter that much. But in hindsight it kind
Speaker 1: of was a a small flag. UH General Motors, the
Speaker 1: UH American automaker, had decided to pull its advertising from Facebook,
Speaker 1: saying it wasn't particularly effective. Um, that didn't really he
Speaker 1: seemed to dampen enthusiasm for the stock by itself, but
Speaker 1: it could have been an indicator that something is wrong.
Speaker 1: And you know, I mean they they are one of
Speaker 1: the biggest companies in the world, even after the what
Speaker 1: some people are calling the Great Recession. Um, you know
Speaker 1: that that's if they don't believe that advertising on Facebook
Speaker 1: is going to be effective, then you know that that
Speaker 1: is a sign to investors said, hey, they may not
Speaker 1: be able to make their money. Now they were only
Speaker 1: one very large company to have done that immediately preceding
Speaker 1: the I p O. But you know, it's it's one
Speaker 1: of those pieces that in again in hindsight, looking back
Speaker 1: on it, you might have said, you know that that
Speaker 1: was a little bit of an open yeah, and anything
Speaker 1: might be wrong. The other element to this is that, uh,
Speaker 1: the way Facebook is currently trying to to, uh, to
Speaker 1: balance out the fact at web ad value is decreasing
Speaker 1: is by adding more users, and so that becomes a race, right,
Speaker 1: You're trying to add more more pairs of eyeballs to
Speaker 1: your service so that the decreasing value of the web
Speaker 1: ads is offset by the number of people who are
Speaker 1: looking at it. So, in other words, if you can,
Speaker 1: if you can add more people, you make it up
Speaker 1: in volume, as they all as the old joke goes,
Speaker 1: if you can add more people looking at this stuff,
Speaker 1: then even though the value per ad is or ad
Speaker 1: impression is dropping, you've got more impressions. You're balancing it out.
Speaker 1: But you can only keep that game up for so long.
Speaker 1: So there's some serious questions about what is the long
Speaker 1: term help for Facebook, because if the AD value continues
Speaker 1: to drop, or even if it plateaus at a really
Speaker 1: low level, how can Facebook continue to grow in revenue
Speaker 1: grow as a company. A lot of companies um success
Speaker 1: is measure hear in how much it grows year over year.
Speaker 1: If you have a company that has got a good,
Speaker 1: sustainable business and is making a steady profit year over year,
Speaker 1: that's fine, But the value of the company doesn't increase.
Speaker 1: It just stays steady. And a lot of the a
Speaker 1: lot of the key psychology and investment is that you
Speaker 1: want your investment to grow over time. You want it
Speaker 1: to increase in value. Um you may not care for
Speaker 1: the idea of just being paid out dividends over a
Speaker 1: long period of time. You want to be able to
Speaker 1: see that that thirty eight dollar share you bought is
Speaker 1: now valued at fifty dollars. So the uh, the problem
Speaker 1: is that if this web ad value continues to decrease,
Speaker 1: or even if plateaus at a low level, then what
Speaker 1: does Facebook do in order to create more revenue, create
Speaker 1: growth and actually succeed as a public company. And frankly,
Speaker 1: we don't have an answer for that. Really, what needs
Speaker 1: to happen is some sort of innovative approach to generate
Speaker 1: new avenues of revenue into Facebook so that um, they
Speaker 1: can they can they can continue to grow. And part
Speaker 1: of the issue is also that there is now this
Speaker 1: move towards mobile platforms which has been happening over the
Speaker 1: last couple of years, but really seriously picked up. I'd
Speaker 1: say since the iPad came out, but you know, the
Speaker 1: iPhone definitely launched it. And really Apple is responsible for
Speaker 1: this move more than any other company I think, uh,
Speaker 1: not the only one responsible, but is chiefly responsible. Well,
Speaker 1: you now have this this area where mobile, the mobile
Speaker 1: experience is really important, and Facebook is really not doing
Speaker 1: so well delivering mobile ads. It's it's even it's it's
Speaker 1: less effective than the web browsing ads are. Well, that's
Speaker 1: a serious problem because if user behavior is moving toward
Speaker 1: a mobile platform and you are not able to take
Speaker 1: advantage of that, and meanwhile, your established platform where you
Speaker 1: are doing better, is starting to lose eyeballs because everyone's
Speaker 1: looking at it on their phone or tablet instead, You're
Speaker 1: really you're really at a losing proposition there, and in fact, um,
Speaker 1: depending upon whom you ask, this could mean a serious fallout,
Speaker 1: not just for Facebook, but for other companies as well,
Speaker 1: because so many web based companies are dependent upon web advertising.
Speaker 1: If it falls through for Facebook, it could become a
Speaker 1: domino effect and fall through for a lot of other sites.
Speaker 1: And that doesn't mean that the entire web disappears. Overnight,
Speaker 1: or that companies go belly up. But it does mean
Speaker 1: that um that it would be a pretty nasty shake
Speaker 1: up for a lot of a lot of companies out there,
Speaker 1: and they would have to find new ways to generate
Speaker 1: revenue that would still um encourage users to to continue
Speaker 1: coming to their their site. For example, let's say that
Speaker 1: you were running a web video company and you generate
Speaker 1: web video and you show it online, and you make
Speaker 1: money through video ads that are placed before your role,
Speaker 1: so pre roll ads or perhaps advertising that's around the
Speaker 1: that's that's on the same page as wherever your videos
Speaker 1: are hosted, and that's how you make money through those
Speaker 1: ad impressions. And let's say that the value of the
Speaker 1: ads just drops through the floor to the point where
Speaker 1: there's no way you can make back the money that
Speaker 1: it costs for you to produce that content just through advertising.
Speaker 1: If you don't come up with another way to get
Speaker 1: people to come in, then your company folds. If you're
Speaker 1: small enough, you know, if you're a large company, then
Speaker 1: you might be able to weather that for a while
Speaker 1: and coast until you can figure out something else. But
Speaker 1: the only real alternative most of these companies have right
Speaker 1: now is to go to the subscription based plan where
Speaker 1: you have users pay for either a per instance or
Speaker 1: per unit of time to get access to your content.
Speaker 1: And frankly, only a small percentage of content companies out
Speaker 1: there I think are capable of doing that and maintaining
Speaker 1: uh sustainability. Yeah, because a lot of companies out there,
Speaker 1: even if they're creating great content, it's so hard to
Speaker 1: convince an internet based audience to pay out of pocket
Speaker 1: for that content. It's not impossible, but it's really challenging
Speaker 1: because we're so used to getting content for what appears
Speaker 1: to be for free. Yeah. Yeah, well I was a
Speaker 1: social model really that goes back to the earlier days
Speaker 1: of the Internet, and it just sort of has been.
Speaker 1: And despite despite people's valuation of subscription to something based
Speaker 1: on whatever it is that they're paying for it, um,
Speaker 1: people still believe to some degree that information should be free.
Speaker 1: So you know, it's like, well, I'm not I'm not
Speaker 1: gonna pay for that. It's you know, the app economy.
Speaker 1: I'll pay four dollars for or, you know, a magazine,
Speaker 1: but I'm not going to go pay for an online
Speaker 1: subscription to that magazine because you know, it's not worth it. Yeah,
Speaker 1: it's so we'll see if Facebook is able to uh
Speaker 1: to one, get through this scandal without too much more trouble.
Speaker 1: This is not the smoothest I p O I've ever seen.
Speaker 1: And then two, if they're able to either create a
Speaker 1: more effective web advertising experience so that way it reverses
Speaker 1: this trend where ads values are dropping, or if it
Speaker 1: comes up with a new way to generate revenue that
Speaker 1: is still not just effective, but it doesn't turn users away.
Speaker 1: That's that's a big question. And in fact, you know,
Speaker 1: I certainly don't have the answer. I mean, there are
Speaker 1: people way smarter than I am who have dedicated years
Speaker 1: and years and years of study and experience to examining
Speaker 1: these sort of problems and coming up with potential solutions.
Speaker 1: And frankly, I mean my hat is off to him
Speaker 1: because I honestly can't fathom it. Yeah, of course it
Speaker 1: didn't happen. It didn't help things much that Mark Zuckerberg
Speaker 1: sold more than a billion dollars worth of stock early on,
Speaker 1: apparently to pay US taxes, And boy, am I glad
Speaker 1: I'm not in his tax bracket. Um. Also, he's got
Speaker 1: to pay money on that for taxes, does he I'm
Speaker 1: sure he'll find that out. Yeah. Anyway, wait, I needed
Speaker 1: so I need one point two billion dollars with the
Speaker 1: stuck so I can pay my taxes and the tax
Speaker 1: on the stock. Yes. Also, Morgan Stanley was talking about
Speaker 1: the possibility of adjusting the I p O price after
Speaker 1: the fact, giving refunds for to make the price more fair.
Speaker 1: Right that I did. I'm glad you brought that up,
Speaker 1: because I did see that this morning, that Morgan Stanley
Speaker 1: was talking about us offsetting that so that the investors
Speaker 1: who went out and bought Facebook at thirty dollars a
Speaker 1: share might be compensated somewhat in the difference of the
Speaker 1: value of what the share was when it hit the
Speaker 1: floor and what it was in you know, real world terms. Yeah. Now,
Speaker 1: if that happened if they bought stock on say, you know, Tuesday,
Speaker 1: after the I p oh that that's that doesn't count.
Speaker 1: We're talking about actual the opening of trading. I should
Speaker 1: also say before we wrap this up, so, uh, we
Speaker 1: started recording this podcast just as trading was beginning, and
Speaker 1: the NASDAC actually a little bit after trading had begun. Uh.
Speaker 1: And since I've had the stock price up the whole
Speaker 1: time since we've done that, it has started off at
Speaker 1: thirty two point oh six, I believe this morning. Yeah,
Speaker 1: that's what That's what I think I said. At the
Speaker 1: beginning of this podcast. It was definitely over thirty two
Speaker 1: is currently standing at thirty one point seven six, so
Speaker 1: it's down almost well three that's uh but that's just
Speaker 1: in the duration of a podcast. You should keep in
Speaker 1: mind that stocks fluctua fluctuate wildly sometimes and it's also
Speaker 1: dependent on other stuff going on. It could be it
Speaker 1: could be at the end of this the day, it
Speaker 1: could be that it ends up being up a dollar.
Speaker 1: I mean, there's just there's there's nothing to indicate in that.
Speaker 1: You know, a four percent drop or three point eight
Speaker 1: percent drop in the duration of a podcast means nothing.
Speaker 1: And uh well, I mean, just just as an instance,
Speaker 1: people have said that Facebook stock prices directly affected Zinga
Speaker 1: stock price. Zinga being the games developer that hosts a
Speaker 1: lot of its social games on Facebook UM and now
Speaker 1: on zinga dot com that is tied to Facebook, using
Speaker 1: Facebook's log in and UH credits system to pay for
Speaker 1: in game enhancements and stuff like that. UM Zinga had
Speaker 1: its I p O earlier this year. Um, and it
Speaker 1: was somewhat disappointing in some people's eyes. But um, the
Speaker 1: Facebook fallout has also affected ZINGA stock price. Um. So anything,
Speaker 1: I mean, all sorts of things will happen that will
Speaker 1: affect it. World news may affect the stock exchange. Um.
Speaker 1: Something that happens in this sector, like a computer manufacturer
Speaker 1: deciding not to make a particular product line might affect
Speaker 1: everyone else is there. Stock may go up or it
Speaker 1: may go down because they say, well, if if they're
Speaker 1: going to stop making them, then the whole market is
Speaker 1: and you know these guys also, you know, it's all
Speaker 1: intertwined with all sorts of weird stuff that goes into
Speaker 1: the way one trader happens to approach them. Yeah, it
Speaker 1: can get the typing of extra zero when they're placing
Speaker 1: a cell order. Yeah, there's some sometimes billions. Sometimes sometimes
Speaker 1: things that seem um kind of ridiculous can affect it.
Speaker 1: I mean, like to the point where you're like I
Speaker 1: can't see it in obvious connection or that's just purely psychological,
Speaker 1: but hey, that's how we humans work. And a lot
Speaker 1: of it is speculation. So all right, well I speculate
Speaker 1: we have run out of things to say on this topic. Yeah,
Speaker 1: I think you're right, all right, um speculation all right.
Speaker 1: So guys, if you have any suggestions or requests for
Speaker 1: topics that you would like to hear us cover in
Speaker 1: future episodes, please get in contact with us. You can
Speaker 1: let us know on Facebook or Twitter. Are handled there
Speaker 1: is tech stuff H s W or you can go
Speaker 1: and send us an email that addresses tech stuffs at
Speaker 1: Discovery dot com and Chris and I will talk to
Speaker 1: you again really soon for more on this and thousands
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