An interesting piece in the Financial Times (Lex in depth: Facebook) that, as its title implies, takes a close look at the upcoming Facebook IPO. The article raises a number of questions about the possible valuation of the company, based on questions about the business model. What it really raises are questions on Facebook's intangible capital:
Vulnerable strategic capital - in contrast to Microsoft and Google:
It is hard to quit using Microsoft's software or Google's search engine, not just because of network effects but also because almost everyone needs to do things those tools make possible. Competitors are more expensive or not as good. Facebook simply is not essential to life or work in the same way.
Vulnerable relational capital - based on the balancing act between customer wants and advertisers needs:
Advertisers could end up offering stuff people actually want. And privacy protection features will be put in place. But the issue is whether what Facebook does to increase the value of the data it collects makes users enjoy Facebook less and use it less. Users might start to think they are the product not the customer. Not a fun feeling.
The contrast with Google is striking. If Lex types "HP 12C calculator" into Google, it is setting itself up to see a certain kind of ad alongside search results. Indeed, users often have commercial intentions when they search. This is absolutely not the case on Facebook. And if the company cannot target ads without turning off users, revenue growth will slow, and soon.
In other words, Google's strategic capital is grounded in the irreplaceable function of its product (i.e. the need for a search engine). As long as its product continues to be the best in meeting that function, it has strong strategic capital. Google's relational capital is based on the complementarity of user needs (i.e. customers and advertisers are using the product for similar purposes). Facebook has neither of these strengths.