Did you get some Facebook shares? Well, good for you. You will now be part of the glorious rags to riches story. But maybe not.
There are some uncomfortable rapids ahead. Firstly, an old sage once observed that only fools and horses buy initial public offerings (IPO's). OK, so you are going to miss a bargain occasionally. But the whole purpose of a public offering in almost every case is to dress the company up for sale, hype it, promote it, tell all the goods news that is to come so as to get the best possible share price. IPO's parade mutton dressed as lamb.
Thus with Facebook. And that leads to our second point: Facebook shares at the IPO were priced at one hundred times current earnings. That means, if earnings stayed the same as today, you would have to hold the shares one hundred years just to earn back the price you paid--let alone get a return on your investment. Care to hang around that long? No, of course not, you say. Why not?
Well, Facebook is going to increase its earnings in the years ahead so much that the current price will seem a bargain. Maybe. But how will Facebook do this? This is the key issue. Sure, there are plenty of ideas, but at the moment it is all vapour-ware, as they say in the software business.
Ross Douthat, writing in the New York Times, explains the problems.
The Facebook Illusion
The smart guys in the Facebook float were those that sold shares and got their cash. Even cleaning staff apparently became multi-millionaires. Time to head for the doors at a gentle trot, guys.
THERE were two grand illusions about the American economy in the first decade of the 21st century. One was the idea that housing prices were no longer tethered to normal economic trends, and instead would just keep going up and up. The second was the idea that in the age of Web 2.0, we were well on our way to figuring out how to make lots and lots of money on the Internet.
The first idea collapsed along with housing prices and the stock market in 2007 and 2008. But the Web 2.0 illusion survived long enough to cost credulous investors a small fortune last week, in Facebook's disaster of an initial public offering.
I will confess to taking a certain amount of dyspeptic pleasure from Facebook's hard landing, which had Bloomberg Businessweek declaring the I.P.O. ''the biggest flop of the decade'' after five days of trading. Of all the major hubs of Internet-era excitement, Mark Zuckerberg's social networking site has always struck me as one of the most noxious, dependent for its success on the darker aspects of online life: the zeal for constant self-fashioning and self-promotion, the pursuit of virtual forms of ''community'' and ''friendship'' that bear only a passing resemblance to the genuine article, and the relentless diminution of the private sphere in the quest for advertising dollars.
But even readers who love Facebook, or at least cannot imagine life without it, should see its stock market failure as a sign of the commercial limits of the Internet. As The New Yorker's John Cassidy pointed out in one of the more perceptive prelaunch pieces, the problem is not that Facebook doesn't make money. It's that it doesn't make that much money, and doesn't have an obvious way to make that much more of it, because (like so many online concerns) it hasn't figured out how to effectively monetize its million upon millions of users. The result is a company that's successful, certainly, but whose balance sheet is much less impressive than its ubiquitous online presence would suggest.
This ''huge reach, limited profitability'' problem is characteristic of the digital economy as a whole. As the George Mason University economist Tyler Cowen wrote in his 2011 e-book, ''The Great Stagnation,'' the Internet is a wonder when it comes to generating ''cheap fun.'' But because ''so many of its products are free,'' and because so much of a typical Web company's work is ''performed more or less automatically by the software and the servers,'' the online world is rather less impressive when it comes to generating job growth.
It's telling, in this regard, that the companies most often cited as digital-era successes, Apple and Amazon, both have business models that are firmly rooted in the production and delivery of nonvirtual goods. Apple's core competency is building better and more beautiful appliances; Amazon's is delivering everything from appliances to DVDs to diapers more swiftly and cheaply to your door.
By contrast, the more purely digital a company's product, the fewer jobs it tends to create and the fewer dollars it can earn per user -- a reality that journalists have become all too familiar with these last 10 years, and that Facebook's investors collided with last week. There are exceptions to this rule, but not all that many: even pornography, long one of the Internet's biggest moneymakers, has become steadily less profitable as amateur sites and videos have proliferated and the ''professionals'' have lost their monopoly on smut.
The German philosopher Josef Pieper wrote a book in 1952 entitled ''Leisure: The Basis of Culture.'' Pieper would no doubt be underwhelmed by the kind of culture that flourishes online, but leisure is clearly the basis of the Internet. From the lowbrow to the highbrow, LOLcats to Wikipedia, vast amounts of Internet content are created by people with no expectation of remuneration. The ''new economy,'' in this sense, isn't always even a commercial economy at all. Instead, as Slate's Matthew Yglesias has suggested, it's a kind of hobbyist's paradise, one that's subsidized by surpluses from the old economy it was supposed to gradually replace.
A glance at the Bureau of Labor Statistics' most recent unemployment numbers bears this reality out. Despite nearly two decades of dot-com enthusiasm, the information sector is still quite small relative to other sectors of the economy; it currently has one of the nation's higher unemployment rates; and it's one of the few sectors where unemployment has actually risen over the last year.
None of this makes the Internet any less revolutionary. But it's created a cultural revolution more than an economic one. Twitter is not the Ford Motor Company; Google is not General Electric. And except when he sells our eyeballs to advertisers for a pittance, we won't all be working for Mark Zuckerberg someday.