Facebook IPO: Could it backfire if users revolt?

The Facebook IPO will make some people very rich, but social-media experts suggest that it could force Facebook to put profits over user experience – and that could cause problems.

Most people know that Facebook’s initial public offering (IPO) will make 20-something founder Mark Zuckerberg even richer than he already is – estimates top some $20 billion.

What is not yet clear, is what the transition means for anyone who isn’t part of the mutual funds, hedge funds, and private equity firms expected to make this the largest Internet IPO in history. Or for, say, the 800-million-or-so Facebook users. 

But social-media pundits suggest that Facebook's shift from private to public ownership might not bode so well for the average Joe on the Internet.

The need to justify a valuation rumored to be as high as $100 billion has led to no shortage of speculation as to how Facebook “plans to extract money from users,” says Yahoo! Finance expert Jeff Macke via e-mail. 

The most likely way for Facebook to go about it is using personal information, he says. Facebook could sell access to users' selected preferences or networks and acquaintances to help businesses offer “personalized” goods or services, such as: “80 percent of your friends enjoy Coldplay, available via Facebook cloud.”  

If Facebook users were to see such offers as a breach of privacy, Facebook could “experience some degree of user revolt,” says Mr. Macke

As it stands, most Facebook members leave the service simply by ceasing to use it. It's possible that if the company gets more proactive in creating revenues, Macke adds, “customers will leave more noisily and in greater numbers.” 

Facebook is already facing increasing competition. “People have no particular loyalty to Facebook when new things come along,” says Mark Tatge, a journalism professor at DePauw University in Greencastle, Ind., pointing to the rapid growth of Google+ and Twitter. “Many users are simply moving on.”

As Facebook rolls out new features to persuade readers to choose Facebook over the competition, aggressive tactics could backfire, he says. 

“The company has tried many new things recently,” he says, pointing to such items as Timeline. “More and more complicated add-ons is not what users want.” 

Facebook has always been innovative in the social-media sphere, Macke says. But the focus of that innovation might change, he adds: "Innovation was previously dedicated to enhancing the user experience,... whereas it will now necessarily be focused on generating income.”  

Financially, not many folks will be able to jump on the early bandwagon, says Cliff Smith, finance and economics professor from the Simon School of Business at the University of Rochester in New York.

“The typical person who hears about this IPO and says, ‘That sounds great, I’d like to get some of those shares,’ isn’t going to be able to call up a broker and say, ‘Sell me 100 shares,” he says. “Those brokers reserve shares of a popular IPO for their best customers, and this one is already way oversubscribed.”

Economists also question whether the company’s enormous capitalization will translate into value for the larger economy. 

If the company invests a significant amount of the proceeds in people, technology, or other assets, this will impact the economy favorably, says Villanova University School of Business professor Anthony Catanach. 

Unfortunately, “most technology IPOs spend most of the monies on 'cashing out' insiders," he says via e-mail. This, then, is simply a wealth transfer from small investors to insiders.

"Now, of course, if the insiders take their newly created wealth and spend it, that too will help the economy,” he says.

Those Facebook insiders who are fortunate enough to have stock options will most certainly join the ranks of previous IPO millionaires – think Google and Microsoft. And real-estate and luxury-car dealers in the Bay Area are busy upgrading their business cards in anticipation of that cash influx.

Word has it that even cash-strapped California budgeteers in Sacramento are eyeing a potential bonanza in capital-gains taxes as initial stock shares start reselling on the secondary markets.