The social media juggernaut's financial filing reveals some uncomfortable truths about Silicon Valley and Wall Street.
By Allan Sloan, senior editor-at-large
FORTUNE -- There's something to be said for being a fossil when it's time to look at a phenomenon like Facebook's pending stock offering. The medium is new, the numbers are high, the buzz is huge, but it's the same old story I've seen a million times in four decades of business writing: A hot company is graciously offering the investing public a piece of its action. At a hot high price, of course.
Look, I know I'm a print dinosaur. I was wrong, early and often, on Google's (GOOG) stock price when it first went public, for which I ultimately apologized. My one and only Internet innovation came about 20 years ago, when I was among the first business columnists to publish an e-mail address. I don't use social media because I value my privacy and fear committing some online indiscretion that would follow me forever.
That said, I'd like to share three things that leaped out at me from Facebook's financial filing. They involve marketing, hypocrisy, and arrogance -- in other words, standard Wall Street fare.
If Facebook's offering ends up being the advertised $5 billion, and the company's stock market valuation is in the expected $75 billion to $100 billion range, it means that only 5% to 7% of the company's shares will be available to public investors.
While there are all sorts of rationalizations for having such a small public offering relative to a company's size, the real reason, as any Street insider will tell you, is to create an initial shortage of stock so that the share price runs up when public trading starts.
It's not enough for Mark Zuckerberg & Co. to have created an amazing, incredibly valuable company over an incredibly short period. They feel the need to use this tacky market trick to drive up Facebook's value even more.
Why do it? Facebook gets bragging rights -- and so do the venture capital types who have put money into the company. A higher Facebook share price begets a higher reported return for investment managers to show potential clients, making it easier to market the next fund. In VC-land, there is always a next fund.
A key selling point of social media is that it's a democratizing force -- everyone's on an equal footing, yadda, yadda, yadda. But Facebook's stock structure, like Google's, is far from democratic.
There's one class of voting stock for the public peasants, and a higher voting class that ensures control for the elite insiders. Everyone's equal in theory. Just not in practice.
Ever since Google included a "don't be evil" screed in its initial public filings, a founder's letter has become de rigueur for a hot Internet offering. Zuckerberg's is a classic. My (admittedly skeptical) takeaway: I'm not just a really rich guy, I'm a really good guy because I'm in this to make the world "friendlier," not to make money.
Yeah, right. And Wall Street exists to help small retail investors. And the check is in the mail.
This article is from the February 27, 2012 issue of Fortune.
By Ben Elowitz, contributor
Facebook is the social king today, but Google doesn't have to give up on the Internet's future.
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News Corp. President Peter Chernin says online video is a premium money-making opportunity. Image: News Corp.
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The emphasis MOREdterry - Apr 22, 2008 10:41 AM ET
By Josh Quittner
Why did Penthouse Media Group plop down $500 million for a bunch of social networks owned by Various -- including the X-rated AdultFriendFinder?Because it's so "sticky," Penthouse CEO Marc Bell told Fortune Wednesday. He wasn't being gross.
We've been working on this transaction for about one year, he said, pointing out that AdultFriendFinder had been on Penthouse's radar forever, but more prominently in recent years as it became the MOREJosh Quittner - Dec 12, 2007 2:20 PM ET
By Josh Quittner
Yesterday, I considered opting out of Beacon on my Facebook account. I pulled up the Privacy page, and looked at the tick box, which would turn off the controversial feature that broadcasts a user's purchases at participating websites everywhere. But I didn't pull the trigger. It was still on an open tab in my browser this morning.
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On Wednesday, Fortune's David Kirkpatrick weighed in on the latest controversy surrounding Facebook and its new advertising system. While some critics in the media say the social networking site is doomed based on its own mistakes, Kirkpatrick argues that the site will not only survive concerns about violations of members' privacy, but will continue to thrive. What do you think? Are you a Facebook fan or foe?Crawford - Dec 5, 2007 2:09 PM ET
By Josh Quittner
A lot of people say that Facebook has jumped the shark. That's flat out wrong. In fact, Facebook is now being devoured by the shark. There's so much blood in the water, it's attracting other sharks. And if Facebook's not careful, one of them is bound to come along and finish it off. I've never seen anything like it in the annals of fast-rising tech companies that MOREJosh Quittner - Dec 4, 2007 12:30 PM ET
By Josh Quittner
One of the rallying cries of the Web 2.0 movement, during its sensational rise over the past five years, is openness. Open systems (Linux, Wikipedia, any phone you can hack from T-Mobile) are good. Closed systems (Windows, The Wall Street Journal Online, any locked-down cell phone you buy from Verizon) are bad.
The basic idea is that the Web itself, that Shiva of the business world, is built MOREJosh Quittner - Nov 25, 2007 12:12 PM ET
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