Facebook Bares Its Soul

"Facebook exists to make the world more open and connected, and not just to build a company," Facebook founder Mark Zuckerberg writes in the letter included in the initial public offering (IPO) filings his company deposited with the Securities and Exchange Commission (SEC) yesterday. "These days I think more and more people want to use services from companies that believe in something beyond simply maximizing profits." Facebook's $5 billion IPO filing reveals much about the economics and inner workings of the company. You can read elsewhere for the specifics on that front. The 150-page document also offers a glimpse of what the company believes and seems to be thinking as it moves more decisively onto the public stage. Some early takeaways:

There's More to Life Online than Advertisements. For many years, Facebook's business model has been simple. Take the vast quantities of personal data we willingly shovel onto the platform. Add in the meta data we reveal as we move about the site. Pair the result with targeted advertisements. Voilà. In 2009, Facebook reveals, ads made up 98 percent of Facebook's total revenue. But by 2011, that figure dropped to 85 percent. Why the shift? For one thing, Facebook reports that last year, a full 12 percent of its revenue came from processing fees on the sale of "virtual goods" through game maker Zynga, as well as direct ads purchased by that company. That's a lot of virtual cattle. But it's likely only the beginning. We may well see Facebook looking past ads toward taking a cut from products, experiences, and apps, an emphasis less like Google's display ads and more like the iTunes store.

The Company Is Serious About (Its Reputation on) Privacy. In Google's own 2004 SEC IPO filing, privacy gets mentioned three times. In Facebook's filing, the word occurs 35 times. Of course, Google's products back then raised fewer questions on the privacy front, but public awareness of the privacy implications of digital tools has inarguably grown in the last eight years. Facebook makes clear that it considers privacy concerns one of the greatest risks facing the company, even mentioning its recent 20-year settlement with the Federal Trade Commission (FTC) over its privacy missteps. "We have in the past experienced, and we expect that in the future we will continue to experience, media, legislative, or regulatory scrutiny of our decisions regarding user privacy or other issues, which may adversely affect our reputation and brand," the filing reads. But, interestingly, blame seems to land not with intentional design choices but with boo-boos. "Our efforts to protect the information that our users have chosen to share using Facebook may be unsuccessful," goes the document, "due to the actions of third parties, software bugs or other technical malfunctions, employee error or malfeasance, or other factors." Does "other factors" include whatever caused it to try out Beacon?

Personas Shall Seek No Quarter Here. Facebook is doubling down on what it calls "authentic identity." It's not just about Facebook. It's about the ideals of the digital realm. "We believe that using your real name, connecting to your real friends, and sharing your genuine interests online create more engaging and meaningful experiences," insists the IPO. "Representing yourself with your authentic identity online encourages you to behave with the same norms that foster trust and respect in your daily life offline. Authentic identity is core to the Facebook experience, and we believe that it is central to the future of the web." Why does the company feel so strongly about this? One hint: "Our terms of service require you to use your real name and we encourage you to be your true self online, enabling us and Platform developers to provide you with more personalized experiences."

Facebook Is Worried About Washington. About that FTC settlement... "We are subject to a variety of laws and regulations in the United States and abroad," the IPO document reads, "that involve matters central to our business, including user privacy, rights of publicity, data protection, content, intellectual property, distribution, electronic contracts and other communications, competition, protection of minors, consumer protection, taxation, and online payment services." Oh, and can Washington and the courts be mercurial: "The application and interpretation of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in which we operate." Facebook is eager to have a better grip on its interests in Washington. In other news, the company's filings with the Federal Election Commission earlier this week reported that its newly launched PAC raised some $170,000 in the last quarter of 2011.

And Thinks Washington Will Adjust. "We hope to change how people relate to their governments and social institutions," the filing reads. "We believe building tools to help people share can bring a more honest and transparent dialogue around government that could lead to more direct empowerment of people, more accountability for officials and better solutions to some of the biggest problems of our time. By giving people the power to share, we are starting to see people make their voices heard on a different scale from what has historically been possible." It goes on to make predictions: "These voices will increase in number and volume. They cannot be ignored. Over time, we expect governments will become more responsive to issues and concerns raised directly by all their people rather than through intermediaries controlled by a select few." Big ideas, but they've got some work to do now. Sure, just about every politician has a Facebook page. But at a time when the president of the United States is "hanging out" over on Google+, Facebook's real-time political-engagement tools are widely seen to be lagging behind.

Let Google Geek—We're Hackers. Google's own IPO process was something of a geek's dream. There was its unusual "Dutch Auction" approach, the goofy "Owner's Manual" for Google stockholders that Larry and Sergey including in their SEC filing, and $2,718,281,828—the targeted value of its initial public offering that, of course, is also Euler's number, a mathematical constant popular with the mathematics crowd. Facebook's initial offering involves nine zeros. That company's corporate identity reflects all the self-seriousness of hacker culture, and there's a reason for that. "We have cultivated a unique culture and management approach that we call the Hacker Way," Zuckerberg writes. Forget the bad guys in the movies. "In reality, hacking just means building something quickly or testing the boundaries of what can be done. Like most things, it can be used for good or bad, but the vast majority of hackers I’ve met tend to be idealistic people who want to have a positive impact on the world. The Hacker Way is an approach to building that involves continuous improvement and iteration." Along those same lines, Zuckerberg reports that the phrase "this journey is 1% finished" is posted in Facebook's offices to remind employees that "we have only begun fulfilling our mission to make the world more open and connected."

Mobile? Confounding. In its section on risks to its business model, Facebook notes that while more and more users are going on Facebook via their mobile devices, "we do not currently directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven." That might be one more reason for Facebook to focus on making money off of experiences and products, rather than ads. But there are challenges there, too. "We are dependent on the interoperability of Facebook with popular mobile operating systems that we do not control, such as Android and iOS," reads the filing." For example, Apple's rules mean that Facebook is limited in how it might collect revenue through its own iPhone app. There's a touch of irony here: Facebook has sought to make itself the platform upon which much of the Internet will run, but that's a model that looks more appealing when you're the one in control.

China? Super Confounding. Zuckerberg might vacation in China, but Facebook remains blocked there, and, as the filing notes, "we do not know if we will be able to find an approach to managing content and information that will be acceptable to us and to the Chinese government." Given that Facebook's business model is, at least at this point, based on the aggregation of personal data, it arguably has more incentive than Google did to not just adopt the "let's give it a try" approach there.

Facebook's first IPO filing offers a peek into the company, one whose monthly users consist of an eye-popping 845 million people. There will be additional filings to come. More than any other entity, Facebook is shaping what it means to be online these days. And if, as a soon-to-be public company, it has to keep pulling back the curtain on what it's doing and thinking, that might not be such a bad thing.

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