What Market Forces mean for Facebook

Originally published as: Andre Oboler, What Market Forces mean for FacebookJerusalem Post Blogs, May 24 2012

A few simple truths were demonstrated this week as Facebook became a publically listed company. The first was the power of government; the second was the ability of social media companies to create hype; and the third truth was a lesson in the wisdom of crowds.

Facebook’s stock listing as a public company was a direct result of legislation; Mark Zuckerberg tried to keep it private as long as possible, but eventually time ran out. The Securities Exchange Act of 1934 requires any company with 500 shareholders and assets exceeding $1 million (later increased to $10 million through regulations) to register with the Securities and Exchange Commission (SEC). Registration with the SEC involves public accountability and disclosure.

Government in its wisdom placed a limit on the size of private companies. It declared a public interest in a company once it reached a certain size. Government has the power to do this as the very existence of a company is itself a product of the law which governments create and control. The truth is that no matter how large the company is, how many users it has, or how many billions of dollars it is said to be worth, it is never going to be beyond the law. Facebook tried to dodge the legal limitations, and lobbied for changes to the law, but in the end it inevitably had to comply.

Government regulates many aspects of life beyond corporate governance. In the US the First Amendment limits the laws that government can make to curtain free expression. Other countries have a more balanced approach with governments enacting laws to prevent hate speech. As Facebook grows, other governments will inevitably have more to say about the way it conducts its affairs. From privacy to racism, from protected political speech to the banning of Holocaust denial, Facebook will need to pay greater attention to governments or limit its international growth and risk stagnation.

The second fact so ably demonstrated with the Facebook launch was the hype new media can generate. It may seem trite, but Facebook is not just a user of social media, it is a player. The power of a social media company to deliver a message was demonstrated by Wikimedia earlier this year when the English Wikipedia was blacked out in a protest against proposed US legislation SOPA and PIPA. Facebook, Google, Wikipedia and other major online destinations dwarf the conventional media in their reach and impact. We seldom think about it because they seldom make use of it. When they do, however, the results can be staggering. We must take a reality check before giving into the hype social media creates. Those who failed to do so were stung when Facebook shares dropped in price.

That brings us to the third truth, the wisdom of crowds. It all began with the Dutch East India Company in 1602. This was the first joint-stock company, and led to the birth of the stock exchange and ultimately Wall Street. Market forces can be a better predictor of public sentiment than opinion polls. Markets like stability and certainty. Collectively we seem less likely to be swayed by hype. When there is the option to cash out, people become risk averse. While Facebook has regularly courted controversy and user backlash, and continues to do so with its insistence that Holocaust denial is not a form of hate, today there is a huge difference; Facebook is now subject to the market.

Before Facebook went public Mark Zuckerberg released a letter to potential investors that outlined his 5 core values. These values include not being afraid to ‘move fast and break things’ and being bold even if that means ‘being wrong some of the time’. The problem is that not everything that is broken can be fixed. In the world of computers a mistake in the code can be easily changed; in the real world, where real people and their lives become impacted, it’s not so easy. Unlike private Facebook, when public Facebook opts to weather the storm, it can’t force everyone else along for the ride.  As a public company, shareholders always have the option to abandon ship. The more people that jump, the lower the share price will go. Opting for conflict, crisis or decisions that fly in the face of common wisdom, will inevitably draw a market response. For this reason alone, Facebook may have to rethink its policy on Holocaust denial and up its game in combating all forms of online hate.

There are of course those that argue a fall in Facebook’s share price doesn’t really matter. After all, Zuckerberg still owns the majority of the company and outside of realms regulated by legislation, he can largely do what he likes. While this might be true, that does not mean his actions will be free of consequences. Clashes with the public, the Facebook user base or government regulators, will see Facebook’s share price punished. A few million more or less may make little difference to Mark, but it can make the world of difference to Facebook investors. Nervousness in the market can take on a life of its own. Dropping share prices can i mpact on company moral and job performance. When Facebook went public, the stakes became real.