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Re: <nettime> The $100bn Facebook question: Will capitalism survive 'val
Bernhard Rieder on Fri, 9 Mar 2012 09:40:34 +0100 (CET)


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Re: <nettime> The $100bn Facebook question: Will capitalism survive 'value abundance'?


Dear Nettimers,

I allow myself to weigh in on this very interesting debate with
a side-note on the estimations concerning the valuation Facebook
is set to achieve through the ongoing IPO process. I would argue
that the enormous difference between current revenues and projected
market value (Google only has a market cap of $200B despite much
higher revenues and profits) can be explained, at least in part, by
investor's somewhat cynical judgement that the "winner takes all"
economics that George Stigler already pointed to in his classic 1961
piece on information economics, which have been escalating in the
globalized marketplace that is the Web, can continue unabated. The
example of Google has show that externality spillover (in the form
of user labor, attention, etc.) for two-sided platforms with very
high numbers of users (with 800 million FB users, the cost per user
to keep the platform running becomes very low) can be so gigantic
that all the monetization can be done on one side of the market
(side one: users, side two: advertisers). This leads to ferocious
competition: If we consider that people use Facebook because they
perceive whatever kind of value in doing so (pleasure, social capital,
etc.), potential competitors can only compete by providing a better
service ("better" meaning a higher perceived value, which is difficult
in a context where market penetration - i.e. "your friends are already
there" - is itself a core part of why people join or stick with a
particular platform) and not on price, because the service is already
gratis. From a microeconomic perspective, in such a situation both
economies of scale and network effects go through the roof and an
initial advantage for one competitor quickly translates into market
domination and near monopoly (specialized niche players have a chance
to survive).

My point is the following: from the perspective of current economic
theory (of the "economics department" kind), it is to be expected that
if unregulated, the social networking market will "naturally" tend
towards monopoly because lock-in effects are simply overwhelming. This
is the hypothesis investors operate on: that the Facebook IPO does not
simply represent the value of a single business in its current state
but of the social networking market on the whole.

cheers,
Bernhard




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