HuffPost noted on Tuesday that Facebook stock had lost one-third of its value since the company's Initial Public Offering on 18 May. Using rather understated language, the article claimed that the IPO 'was highly anticipated and was supposed to offer proof that social media is a viable business and more than a passing fad.'
No. The IPO was supposed to prove much more than Facebook's viability - instead it was supposed to prove the triumph of the new digital economy. After all, this is a company with 900 million users, a company that has reinvented how we share information, has unparalleled access to personal data, has huge growth potential and is the epitome of social media dynamism. This amazing company was finally to be floated and, of course, not on the industrial-era New York Stock Exchange but on the cutting-edge NASDAQ.
And yet it was a disaster. Not just because of the technical problems, though these certainly contributed, somewhat ironically, to the turbulence of the day. What really messed up the IPO was that it was preceded by an information campaign far more redolent of the bad old media age than the high-tech transparency of the digital economy. According to the Wall Street Journal, Facebook's bank, Morgan Stanley, briefed only a minority of wealthy investors about concerns it had about the company's prospects and that the company and its underwriters effectively hid reduced growth forecasts from would-be buyers. It also appears that the bank set the share price too high with a price-to-earnings ratio of over 50 (in contrast, for example, to Google's 12) and that the bank was forced to intervene to protect the price, behaviour that is far from desirable in what it supposed to be a seamless and open free market. No wonder that the IPO, and the company itself, is facing official investigations and no wonder that, despite being faced with reimbursing clients who lost money, Morgan Stanley and other underwriters still stand to make approximately $100m from the deal.
In my opinion, this kind of greed, conniving, secrecy and hype sounds suspiciously like the 'old economy' deals in which transparency and good sense were abandoned in the rush for profits. But perhaps we should have known this was going to happen as soon as Zuckerberg et al insisted on a dual class structure in which operational control of the company by senior executives would be consolidated and protected. At this stage, warning bells should have gone off.
Of course, they're not the first to do this. After all, in Google's IPO, the executive triumvirate of Sergey Brin, Larry Page and CEO Eric Schmidt controlled 37.6 per cent of the company leaving new investors, in the words of Page himself, with 'little ability to influence its strategic decisions through their voting rights'. And the great irony was that they got this idea, unusual for technology companies, from old media dinosaurs like the New York Times Company, The Washington Post Company and Dow Jones, publishers of the Wall Street Journal.
Facebook is now in danger not simply of undermining its own brand reputation but of jeopardizing prospects for the wider new media environment by saturating the market for advertising and driving down costs. As media commentator Michael Wolff puts it, 'Facebook will continue to lower its per-user revenues, which, given its vast inventory, will force the rest of the ad-driven Web to lower its costs.' We're already seeing the impact of this on flagging demand for shares in other young internet companies like games developer Zynga (share price down 41 per cent since mid-December) and online reviews service Yelp (down 22 per cent since the Facebook IPO). As the Financial Times argued recently, 'there are fears that the turn of sentiment against Facebook has spooked the broader market, particularly retail investors who previously favoured the sector.'
The more significant question is, however, why on earth should we be surprised? Surely this is how capital - whether in the shape of the automobile industry, oil, pharmaceutical or even social media - operates.
True, this is the opposite of what the speechwriters for the new economy have long argued. Chris Anderson, Larry Downes, Jeff Jarvis, Charles Leadbeater, Don Tapscott and Anthony Williams have all insisted in best-selling books that the internet is responsible for massively lowering transaction costs, stimulating innovation, collapsing barriers between producers and consumers and indeed ironing out all the glitches of the command economy.
The problem is that these writers articulate a deterministic vision of a frictionless capitalism in which questions of property have been sidelined, profitmaking naturalized and growth exaggerated. The dynamics of the free market have been abstracted from their daily operations and replaced with a technologically-induced vision of an economic system based on an innate tendency to equalize social relations and sustain high growth rates.
Yet even a digital capitalism is still subject to the same episodic crises of supply and demand and the same periods of speculation that affect other varieties of capitalism. Many of the factors that were symptomatic of the 'mass' media economy -- especially its propensity towards monopolization, commodification and accumulation -- are central to the dynamics of a new media economy shaped by the contradictory forces of the internet that promise dispersion but reward concentration and that fetishize openness but encourage proprietary behaviour.
The digital economy, just like the 'analogue' one, is highly unstable. 'The crash will come', argues Michael Wolff. 'And Facebook--that putative transformer of worlds, which is, in reality, only an ad-driven site--will fall with everybody else.' The digital world is not a parallel economy but one that accentuates the tensions between the creativity and collaboration of a generative system and the hierarchies and polarization prioritized by a system that rests, not simply on the drive to innovate, but on the relentless pursuit of profit.