Greg's Corner

Facebook’s “fuzzy” math: There’s just no need

Did we learn nothing from the dot-com bust just a decade or so ago? Have we not learned lessons from the financial meltdown of the past few years? Or is that push for “Mo’ Money, Mo’ Money” really so strong, that we’re willing to let financial fairy tales distort our perception of what’s really in front of us. 

I’m talking about bringing back some honesty to the world of business, some transparency that keeps companies from exaggerating their financial health and exposing the markets to unnecessary risk. Case in point: Facebook and its upcoming Initial Public Offering. 

Washington Post columnist Barry Ritholtz had a great piece last week about Facebook and a set of non-financial numbers might raise an eyebrow of the real growth potential of the social networking giant. He looked at the way Facebook counts active users and, more importantly, how they define those users. 

Facebook has become just as much a “platform” as it has a destination site, allowing people to interact with Facebook without actually visiting Facebook. Have you ever clicked the “Like” button at the bottom of an blog post and had it show up on Facebook? Sure, you have. But you didn’t go to Facebook.com – the actual site – to do that, did you? Consider this excerpt from the Post column: 

Why does this user-behavior metric matter? Consider what it means in terms of how “daily users” will generate revenue and profits. If all users do is click a “Like” button, but never make it to Facebook.com, they cannot be “monetized.” They cannot be marketed to. They do not see any advertising. They cannot be sold any goods or services. They take advantage of FB’s extensive infrastructure to tell their FB friends (who may or may not see what they did) that they liked something online. That’s all that happens. So they not only fail to generate revenue for Facebook that day, but they are actually a cost. It’s not cheap to maintain that massive infrastructure of Like buttons everywhere.  

Now, if I’m an investor, this is important to know. Once investors start breaking down this information on a quarterly basis, via public filings, these are the sorts of questions that Facebook will have to address, especially if the financials don’t meet the expectation of the hype. Companies learn those lessons everyday on Wall Street. Just ask Groupon investors. 

Don’t get me wrong. I made a conscious decision a long time ago to run my business in a manner that doesn’t have me answering to investors. And I’m happy with the way my company has grown over the last decade, in part because of that decision. But that what was best for me and my business. I’m not here to question Facebook’s decision to go public.

What I am saying, though, is that businesses today need to be more responsible and transparent. We’ve seen what happens to businesses when they’re less than fully honest about the bottom line, the number of users, the growth forecasts and more. Some companies only talk about products “shipped,” instead of products “sold.” I can ship a million products, but if I don’t sell any of them, I’m not making any money. 

I guess this really gets to me because Facebook is undoubtedly a great company with amazing growth potential. Why does anyone feel the need to incorporate “fuzzy” math into it? They’ve achieved critical mass and are on a growth trajectory that’s redefining the Web, marketing and advertising and even parts of the global economy.

They don’t need to operate in a manner that indicates the opposite, that sets them up for a “gotcha” moment by analysts, bloggers or the government. They don’t need to cloud the picture for consumers or investors or even themselves. 

The housing market and the banking industry operated for years behind cloudy pictures and fuzzy math and look how that turned out. If ever there was a company that could be honest and transparent without compromising its potential, that company is Facebook. 

And yet, we remain determined to repeat history.