Facebook investors gamble on a company where user loyalty means everything

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Facebook may be the world's richest leap of faith.

When the stock of the eight-year-old social-networking company finally begins trading on Friday morning, investors and gawkers alike will stand back, goggle-eyed at its sky-high valuation, which is almost certain to reach more than $100-billion (U.S.).

In financial circles, that sort of price tag on an eight-year-old company inspires superlatives. But the wider significance of its debut as a public company is likely being overstated. As it completes one of the largest initial public offerings ever, Facebook is being held up as the poster child for many things – for a new era of social media, for a new way advertisers can reach consumers, and for startups that stay cool even as their founders become billionaires.

Yet it might not be a bellwether for any of those things. Facebook is sui generis; no company is like it. Its founders created a massive virtual town square that depends almost entirely for content on its 900 million regular users.

In that sense, Facebook is a remarkably mature business: How many newly public companies can claim to have 13 per cent of the world's population in their grasp? Many users continue to regard the network as an indispensable utility, even as they moan about its technological evolution and sometimes abusive attitude toward privacy.

But nobody really knows whether those users will stay so loyal, so addicted, as their experience of Facebook online and on mobile devices evolves. Its new investors are, in part, making a $100-billion leap of faith that they will.

One clear risk to that bet: Privacy concerns, which have been a thorn in Facebook's side for years, may only become more pointed as it opens up its operations to the scrutiny of being in the public markets. While it has settled several cases with privacy commissions around the world, the company has continued to push the legal boundaries.

It must, if it wants to be as successful as people expect. That's because, for the past number of years, marketers have been tantalized by the promise that Facebook and its online brethren will finally provide the Holy Grail of advertising: the ability to track exactly which ads prompted people to buy.

With its epic amount of sometimes very intimate user data, Facebook is seen as being in a unique position to serve up ads at the precise moment people are most receptive. Large companies are jumping on board: Facebook's advertising sales doubled last year, and represented 85 per cent of its $3.7-billion in revenue.

But while Facebook is now considered an essential communication channel for large global brands, many have been unable to use it to target consumers. Ad buyers say Facebook, which was created to link individuals and has struggled to adapt to serving advertisers, does not permit them to zero in on users in the way they would like.

The most public rebuke of Facebook's limitations came this week when General Motors said it was pulling its $10-million ad buy from the social network, which it deemed "ineffective." It insisted it would stay on Facebook, but only on its brand pages, which are free. If other companies follow suit, Facebook would have the same problem strangling old media companies: the need to justify charging a fee when advertisers can get what they want for free.

However, many suggested the auto-maker just didn't get Facebook.

"Brands are struggling to get digital marketing right," said Michael Scissons, the CEO and president of Syncapse, a Toronto-based company that manages the social media presences of large companies, including Coca-Cola, Research in Motion and Anheuser-Busch. If a company is advertising on Facebook to create awareness for its brand, rather than sell a product, it would be foolish to be disappointed when people don't click on its ads, he noted. "That's not the objective," he said.

For Facebook to justify its $100-billion value, it will have to grow quickly and for many years – which means finding new things for advertisers to buy that will be effective. One plan is a more direct attack on Google, the king of web advertising. Likely in the next year, Facebook is expected to introduce a search function. Ads could match users' searches – something Google does with impressive accuracy. If users embrace that, it could prove a gold mine for the social network.

Already, Facebook has helped usher in profound shifts in the relationship between people and companies. Where once there were customers and corporations, there are now "fans" who are required, if they wish to access information from a company or receive a discount, to declare to all of their "friends" that they "like" that company, even if they don't.

But companies, too, have had to change their behaviour, at least to appear more receptive to people's concerns.

"Brands traditionally think about media in campaigns," noted Veronica Holmes, the president of digital for the Canadian office of media buying firm ZenithOptimedia. Facebook has forced companies to shift away from the mentality of intermittent advertising campaigns. Instead, in marketing parlance, they must be always "always on" – like a politician constantly campaigning. Brands use Facebook to create communities, to make people feel as if they have a direct connection.

"It's a communication platform, it's a relationships platform, and for brands to take advantage, they really have to be in that mindset, and they have to sort of open their minds to that constant relationship nurturing," Ms. Holmes said.

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Facebook Stats:

Valuation

$104-billion

Approximate valuation of the Facebook initial public offering. By increasing the price range of its IPO to $34 to $38 per share – up from $28 to $35 – Facebook will likely become the third-biggest IPO in U.S. history, behind Visa and General Motors. Thanks to overwhelming demand, Facebook's company insiders are also selling an additional 84 million shares, or 25 per cent more than the company planned to float earlier this week. As such, Facebook could raise anywhere from $15-billion to $18-billion from the sale.

Users

901 million

Facebook has more than 900 million users who log in at least once a month, nearly three times the population of the United States. Over half of the U.S. population is on Facebook, but it makes only a few dollars per year from each one, chiefly through advertising.

Worldwide

1 in 3

Of the two billion people online in the world, 34 per cent are on Facebook. In October, 2011, Facebook reached more than half of the world's global audience (55 per cent) and accounted for approximately three in every four minutes spent on social-networking sites. The site is now available to anyone over 12, in almost every country, in 70 languages.

Reach

1 in every 7 minutes

The amount of time spent online around the world that are spent on the site.

Daily

23 minutes

The amount of time spent on the site, on average, per person, per day.

Kevin Bacon of the Internet

3.74 degrees of separation

According to a study last year, there are an average of 3.74 degrees of separation between any one Facebook user and another, down from 4.28 in 2008. The number of degrees represents the number of people in a friendship chain, excluding the people at either end. Or, as the authors put it: "When considering another person in the world, a friend of your friend knows a friend of their friend."

Millionaire artist

$500-million

Graffiti artist David Choe was offered $60,000 to spray-paint the company's first headquarters in Palo Alto, Calif., in 2005. Instead, he opted for stock shares. He now stands to earn $200-million to $500-million after the IPO.

Taxes

$1.5-billion

Revenue in in taxes struggling California is expecting to glean from the IPO.

Memory And Storage

100,000 times the size of the Library of Congress

Facebook stores more than 100 petabytes of your photos and video. That's 100,000 times the size of the Library of Congress – or the equivalent memory of 1.6 million top-of-the-range iPads. Stack those up and they would reach 379 kilometres into the sky.

Content generation

300 million

That's the number of photos uploaded to Facebook per day in the three months ended March 31, 2012. There were more than 125 billion friend connections on Facebook as of Dec. 31, 2011, and users generated an average of 2.7 billion Likes and Comments per day in that same period.

Personal information

1,000 pages

The company records over 47 categories of data on each user. For some users, that amounts to more than 1,000 pages if you printed it all out – per person.

With files from: AP, Reuters