Q&A: What to Make of Facebook's IPO

Not being particularly tech-savvy, I've found following the Facebook-going-public news to be a bit perplexing. Sure, I know that the Internet behemoth just filed its IPO registration yesterday, revealing for the first time that the company has been profitable for three years and brought in $3.7 billion in revenue in 2011. But what does that mean? And what does Facebook's entry into the public market mean for the Internet? For Google? For the hundreds of millions who use the site?

To get some answers, I called up Nicco Mele. Mele—named one of the "best and brightest" in 2003 by Esquire—pioneered Internet fundraising as webmaster for Howard Dean's 2004 presidential campaign. He later founded EchoDitto, which consults on Internet strategy with both Fortune 500 companies and nonprofits, and also had a hand in several Internet start-ups. He's currently teaching at Harvard's Shorenstein Center for the Study of Press, Politics and Public Policy. 

According to Mele, the information raises two seemingly contradictory questions: What has Facebook done to make itself so profitable? And are they as profitable as they should be? He also said that the IPO only reveals the extent of the revenue-war between Facebook and Google.

Here are the highlights from the conversation.

Facebook's numbers were better than expected:

"Facebook's been profitable for three years. That was a surprise. And not a little profitable—a lot profitable. ... Almost all of their revenue is advertising-based. That makes them a media company in my opinion."

Should Facebook be making even more?

"They're making a billion dollars a year in profit. But based on the volume of activity they have, 800 million accounts, 400 million log-ins daily, I'd kind of expect them to be making more money. ... If they're profiting a billion dollars a year and have 400 million people logging in daily, their profitability is less than $3 a person. Which means each daily visit is worth pennies. I'd want to look at the profitability based on per-daily visitors.

"I'd want to look at Google's profitability divided by daily visitors and figure out: Is a daily visitor worth a dollar to Google? In which case if a daily visitor's worth less than a penny to Facebook, that's not so great . Or is it also worth a penny and so Facebook's actually in good shape? The reason I'm interested is because my instinct is that Facebook has figured out how to really make money from their user base.

"Generally in the Internet business, to have half of your website users come back every day is totally and completely unheard of. And so that's why I was surprised they're not making more money. They have the Holy Grail, and they can't figure out how to make money on it. But I'm kind of resistant of going the whole hog on that assessment."

Google versus Facebook

"One thing that is certain is they are at war with Google for the future of online revenue. All of that money they're making on advertising, they probably took away from Google. I think Google's basically been downplaying the last six months' decline in search revenue. Not so much a decline as a significant slowdown in growth. When I look at Facebook's numbers, I wonder how attributable that is to Facebook. 

"They are competing visions for the Internet. You can't get into Facebook unless you have a password and an account and your experience is all mediated by people you know. Google is a much more open vision for the Internet. But presumably they're making money on anything you do on the Internet."

Facebook's relationship with game-development company Zynga:

"Twelve percent of their revenues are from Zynga. That's pretty astonishing. … That means that when people are buying things inside of Zynga games, Facebook's taking a cut of it. I can't decide what that means. On the one hand, that means Facebook is dependent on Zynga's games for 12 percent of their revenue. On the other hand, that tells you how dependent Zynga is on Facebook. 

"I need to investigate a little more. I would say on first glance, I was expecting Zynga to be more like 1 percent of Facebook's revenues. So definitely I'm surprised at that, and honestly, probably what that suggests to me is that Facebook should acquire Zynga at some point. But I don't know—I have to think if I really think that. I haven't decided yet."

What's to come:

"I think what we're going to see as we get closer to the IPO is people trying to figure out if Facebook's revenue is appropriate to their traffic or appropriate to their business. That question of: Is less than a cent per day good or bad? How do you evaluate that performance? That question is really going to be front and center. 

"I think that thus far, Facebook has been relatively inscrutable and doing things the way they want to do them. And once you're a publicly traded company, you come under a lot more scrutiny. There's gonna be a lot more questioning of their various business decisions. 

"One way of thinking about this is everyone is trying to figure out how you make money on the Internet. And here is one of the few examples. So that raises the question why? Why is it working? How is it working? Are there lessons to be learned there for other people?

"Despite the fact that we're way deep into this whole Internet thing, I think that we still do not understand the business models around it. So the primary impact of this whole Facebook IPO is going to be trying to understand what's really going on."

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