Patrice Riemens on Thu, 13 Mar 2014 13:23:06 +0100 (CET)

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<nettime> Ippolita Collective, In the Facebook Aquarium Part One, section #8,

Ippolita Collective, In the Facebook Aquarium Part One, section #8, 1

Free Markets and Financial Bubbles

The radical transparency of Facebook users finds no equivalent in the
firm's own financial dealings, which are singularly opaque and openly
flout every rule of the market economy, despite the latter's regulatory
minimalism and arbitrariness. This dangerous game has resulted of late in
developments heralding an even larger speculative bubble than the
'dot-com' one at the Millenium's beginning. In discussing them we will
use, on purpose, only  unimpeachably pro-market sources, such as the /Wall
Street Journal/ and the /Financial Times/.

Here is a story that almost beggars belief. On January 3, 2011, it is
discovered that Goldman Sachs is, together with the Russian company
Digital Sky technologies, in the process of investing 500m $ in Facebook
[39], while giving its richest clients the opportunity to invest in their
turn (Goldman Sachs is, as risk accessor one firm which is among the main
actors answerable for the financial crisis). The Security and Exchange
Commission (SEC), the body that is supposed to supervise the financial
markets, goes on red alert: one of the few rules it strictly enforces
being that no more than 500 separate investors are allowed in off-exchange
deals, and that above that number resorting to the primary market becomes
mandatory, meaning Wall Street. But in order to enter an IPO (initial
Public Offering) companies need to make their accounts public, so as to
enable investors and potential shareholders to arrive at an informed
business decision. Goldman Sachs' route around this 'obstacle' was to
create a special vehicle for a few selected ueber-rich clients, while
making 1,7bn $ profit in the process. This clearly bypasses the rules of
the market, enabling Facebook's shares to continue being traded on the
secondary market, and hence avoid the need to make the firm's balance
sheet public.

By a strange coincidence, the firm's valuation is multiplied in the next
twelve month by a factor five, and then doubles again in the following
half-year: at the end of 2009, Facebook was esteemed to weigh $ 10
billion, rising to $ 25bn in July 2010, and to a further $ 33bn in August.
There was  talk of $ 50bn by the end of december 2010 [40]. Meanwhile,
post-dotcom Google's valuation was $ 23bn in August 2004 (when it IPO-ed),
but Google is at least an innovative technology firm, whereas Facebook
merely offers a cocktail of already existing technologies. And then,
surprise: on January 20, 2011, it was announced that the Facebook IPO
won't happen, as Goldman Sachs got cold feet at the prospect of a tussle
with the SEC, with American small investors furious to be kept out of this
juicy deal, while ueber-rich speculators who went onboard with Goldman
Sachs' offer were already laughing all the way to the bank at the
prospects of fat profits [41].

Facebook manages to skirt even the most minimal of financial controls. The
firm's valuation is six times profits (only two times for Google), and it
has accumulated half a billion dollars in cash so it can indulge in new,
fancy take-overs. Fact is, that Goldman Sachs was able to finance Facebook
out of its own debts (just six month before investing, Goldman Sachs had
to fork out $ 550m on settling a case of fraudulent misconduct), and this
by luring investors with a prospective IPO of Facebook. When Facebook
finally came to Wall Street, it was valued at $ 115bn. Call it a great
bargain for those early investors, who're bound to cash in big time, but
it is less likely to be a sweat deal for the small investors, as such
astronomic valuations are fast on their way to cause a phenomenal
financial bubble. Early financing for Twitter, Groupon, and all other
technological start-ups was a matter of millions, not billions Dollars.
Yet all the same, the mechanism which made it possible to milk colossal
profits out of 2.0 start-ups' IPOs has begun showing serious structural
strains. This is well illustrated in the analysis of post-IPO
transactions in Linkedin (May 2011) and Groupon (November 2012) shares,
which (we take as) early signs of the impending collapse of Facebook
(##*). The two afore-mentionned firms had something of a rocky round on
the stock exchange, especially Groupon, which had carried out the most
important financial operation in the technology sector since Google's IPO
in 2004. And soon after the 180 days anti-speculation delay before which
trades were not allowed, Linkedin shares also went South, big time.
Meanwhile, Groupon shares' devaluation had started right after the IPO, as
if the boom-bust (or creation-evaluation-investment-profit-taking) cycle
had suddenly accelerated yet again.

Surely, these firms do not rely on virtual profits only, and in any case,
they are totally dependent on the data they have massively collected from
their users. As a consequence, investors have started to have second
thoughts about these firms' growth potential. And, as we have learned from
the financial crisis without end we have been in for the past few years,
the growth perspective is all what matters. This mad system is now
pursuing its course full throttle, following the law of data. 'Law of
data', as we now have to do with enterprises that are fully steered by
data, and in matters of economic and financial markets, by the dystopia of
societies self-regulating in real time by way of technological systems of
control based on available data. Hence, there are more and more opinion
polls, an unbelievable number of measurements are carried out, as if to
factor in what cannot be factored in: the social well-being, which is a
function of individual well-being. The aftereffect of profiling system on
individuals is even harder to evaluate.

Take for example an instance where the humongous amount of measurement
even turned counter-productive: Zinga, the world leader of on-line
video-games. This firm swears by measurement systems and is constantly
busy calculating the top output possible. The work atmosphere is so
stressed that any personal well-being is well-nigh ruled out. Or, to put
it differently, if machine law is faster, more powerful, produces more
data, the same demands, made on human beings, nip any creativity in the
bud and generate only anxiety and distress [41]. Even the financial
markets have become wary of the over-competitive atmosphere within those
companies, as they see top talent suffering from psychological burn-out,
something that reflects very badly on business. Zynga's IPO in December
2011 went without a snag, but shares started dropping the very same day.
In this firm's case, profits are dependent upon its ability to ship ever
more new, successful video-games, beating previous intake records every
time. But it's a bit difficult to break records when one is the champ
already. As everybody knows, work does not set free, and even less so in
Silicon Valley.

(to be continued)

Next time: Silicon Valley companies valuation blues ...

[39] New York Times (Jan 3, 2011):
[40] Financial Times data.
[41] Wall Street Journal, 'Facebook Flop Riles Goldman Clients'
Meanwhile Facebook went 'public' with a turbulent IPO (May 18, 2012),
again courtesy Goldman Sachs, with share prices losing out already on the
launch day itself due to last-minute over-valuation. The following weeks
were rocky enough, but the share price has recovered, and even
substantially risen ever since. Today (March 12, 2014), it stood at $
70.10, more than twice the original offering price (-transl)
(##) News of FB's death might have been greatly exaggerated - up to now.
It indeed looked more likely at the time this book went to the printer -
just after FB's IPO in May 2012.
[41] 'Is Zynga?s culture really rotten at the core? Hear how Mark Pincus
described the mission in April':
Actually, the New York Times article is more conclusive than Geekwire in
this regard:

Translated by Patrice Riemens
This translation project is supported and facilitated by:
The Institute of Network Cultures, Amsterdam University of Applied Sciences
The Antenna Foundation, Nijmegen
( - Dutch site)
( - english site under construction)
Casa Nostra, Vogogna-Ossola, Italy

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