845 Million Users: Facebook Files for Its IPO

On Wednesday, Facebook filed its S-1 with the Securities and Exchange Commission, and the most anticipated technology initial public offering since Google's debut in 2004 officially began. The document revealed the company's numbers for the first time: eight hundred forty five million monthly active users at the end of 2011, four hundred eighty three million daily active users, and revenue of three point seven one billion dollars, up eighty eight percent. The company planned to raise up to five billion dollars, and the figure was only the opening bid. The filing was a formality, and the filing was also a revelation. This is the February 2012 story, and the story is the lesson: ...

845 Million Users is the subject of this article: the moment the social network opened its books, and the questions that the opening raised. The filing is the anchor, the numbers are the revelation, and the lesson is about the distance between a company's mission and its market.

1. The Filing

The S-1 landed on Wednesday, February 1, and the document did what documents rarely do: it stopped the world's attention. Facebook had filed its registration statement with the Securities and Exchange Commission, the first formal step toward an initial public offering, and the move had been anticipated for years. The company had been the giant of social media since its founding, and the filing was the moment its finances became public. The press called it the most anticipated technology public offering since Google's in 2004, and the comparison was the frame for everything that followed. The countdown to the debut had begun.

The filing was the beginning of a long process, not the end. The registration would be reviewed, the roadshow would follow, and the price would be set by the market's appetite. The document itself was the first chapter, and the first chapter was the numbers. The company planned to raise up to five billion dollars, a placeholder figure that the bankers would refine, and the plan alone made the offering one of the largest in the history of the technology industry. The details would change, and the direction would not. Facebook was going public, and the world was reading the paperwork.

2. The Numbers

The numbers were the revelation, and the numbers were enormous. The company reported eight hundred forty five million monthly active users as of December 31, 2011, a figure approaching the population of the developed world, and four hundred eighty three million daily active users, the people who came back every day. The users were the story, and the story was the asset. The revenue was three point seven one billion dollars for 2011, up eighty eight percent from the year before, and the growth was the proof that the network could be monetized. The net income was one billion dollars, a number that made the company profitable by any standard.

The shape of the business was visible in the same document. Advertising was about eighty five percent of the revenue, and the advertising was the engine. The ads were in the news feed, on the pages, and across the network, and the targeting was the technology that made them worth more than the banners of the old web. The users gave the data, the data built the profiles, and the profiles priced the ads. The machine was elegant, the machine was enormous, and the machine was the business. The filing showed the machine to the world for the first time, and the world could see that the machine worked.

3. The Letter

The filing began with a letter, and the letter was the mission. Mark Zuckerberg wrote that the company did not build services to make money, that it made money to build better services, and the sentence became the most quoted line of the document. He wrote about the hacker way, the culture of building, testing, and shipping, and he wrote about the social mission: making the world more open and connected. The letter was personal, idealistic, and carefully written, and it was also the pitch. The founder was telling the investors what the company believed, and the belief was the brand.

The letter did what the best letters do: it connected the numbers to a purpose. The eight hundred forty five million users were not a statistic; they were the people the mission had reached. The revenue was not an end; it was the fuel for the next mission. The framing was idealistic, and the framing was also strategic. The investors who read the letter were being told that the company was not a media business or a technology business but a mission with a business attached, and the distinction was worth billions. The letter was the first page, and the first page was the frame.

4. The Wave

The filing rode a wave, and the wave was the context. LinkedIn had gone public in May 2011 and closed its first day up more than one hundred percent, and the pop had made the social internet the story of the market. Groupon had followed in November, closing up about thirty percent, and Zynga had come in December, closing down five percent, the first crack in the pattern. Facebook was the biggest of them all, the company that the wave had been waiting for, and the filing was the signal that the wait was ending.

The comparison to Google was the one the bankers used, and the comparison cut both ways. Google had gone public in 2004, the last offering that had felt this inevitable, and the comparison flattered Facebook: the same scale, the same dominance, the same sense of a generation-defining company. The comparison also set the bar: Google's debut had been the start of a long climb, and the market expected no less from Facebook. The social wave had taught investors to expect pops, and the expectation was the pricing pressure. The company would be valued against the greatest debut in the industry's history.

5. The Machine

The filing described the machine, and the machine was the platform. Facebook had grown by giving people the tools to connect: the profile, the news feed, the photos, the messages, the pages, the games, and the apps. The platform was the ecosystem, and the ecosystem was the moat. The developers built on top of the network, the games spread through the feed, and the users stayed for the graph. The machine was the reason the company could grow from a dorm room to eight hundred forty five million users in eight years, and the machine was the reason the growth could continue. The filing showed the machine's scale, and the scale was the argument.

The machine had a cost, and the cost was the control. The developers who built on Facebook built on Facebook's terms, and the games that grew on the platform grew on the platform's rules. The company was the landlord of the social graph, and the landlord was the position that the filing described. The dependence was mutual: the developers needed the users, and the users needed the apps, and the company needed both. The machine was powerful, the machine was young, and the machine was the bet. The investors were buying the machine, and the machine was the company.

6. The Risks

The risks were in the same document, and the risks were the other story. The company had hundreds of millions of mobile users, and it had no mobile advertising, and the shift of the world to phones was the threat at the center of the offering. The news feed was the engine of the engagement, and the dependence on the feed was the fragility: a change in the feed, a fatigue in the users, a rival in the space, and the machine would feel it. The filing disclosed the risks in the dry language of the law, and the dry language could not hide the size of the questions.

The control was the risk that the outsiders noticed. The company had a dual-class share structure, and the structure gave Mark Zuckerberg control of the company even after the offering, and the control was the point. The founders of the social wave had watched the previous generation lose their companies to the market, and they had built the structure to keep the vision safe. The investors would own the stock, and the founder would own the direction, and the trade was the price of the mission. The critics called the structure undemocratic, and the supporters called it the protection of the vision.

7. The Questions

The questions began the moment the document appeared, and the questions were about the price. The company had never disclosed its finances, and the disclosure had given the market the raw material for the arithmetic: the revenue, the growth, the profit, and the users. The analysts ran the numbers, the bankers built the models, and the valuation talk filled the news. The company was expected to be worth tens of billions, perhaps a hundred billion, and the range was the debate. The believers saw the growth, the users, and the mission, and the skeptics saw the mobile risk, the dependence, and the control.

The questions went beyond the price, and the questions were about the company. The privacy debates had followed Facebook for years, and the filing was the moment the debates met the balance sheet. The users were the product, and the product was the data, and the data was the advertising, and the advertising was the revenue, and the chain was the business. The regulators, the press, and the users all read the same document, and they all found their own story. The filing was the first public accounting of a private company's bargain with the world, and the accounting was the beginning of the conversation.

8. The Lesson

The lesson of the filing week is that the numbers are the story, and the story is the numbers. The company had built its legend on the mission, the design, and the growth, and the legend had been the story that the press told. The filing replaced the legend with the ledger, and the ledger was the new story: eight hundred forty five million users, three point seven one billion dollars, one billion dollars of profit. The numbers did not diminish the mission; the numbers made the mission real. The investors could now see what they were buying, and the users could now see what they were part of.

The second lesson is about the beginning of the process, not the end. The offering would take months, the roadshow would test the story, and the market would set the price, and none of that was decided by the filing. The filing was the prologue, and the prologue was the promise. The company had opened its books, and the opening was the commitment to the market. The questions were public now, and the answers would come with the quarters. 845 Million Users is the February 2012 story, and the story is the lesson: the document is the beginning, and the beginning is the numbers.

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