The truth about Facebook

My take on the Facebook IPO. From this morning’s Observer

There are two classes of share – A and B. Each class B share carries 10 times the voting rights of its class A counterpart. Zuck owns 27.1% of the class B shares outright and the company’s pre-IPO filings to the Securities and Exchange Commission revealed agreements with other owners of class B shares to assign their voting rights to him. The net result is that he has voting control over at least 57.1% of the class B shares. In other words, he’s omnipotent.

This would be a problem even if Zuck had the brains of Einstein and the wisdom of Solomon. But, alas, he doesn’t. He is undoubtedly a smart and talented guy, but he also happens to have a megalomaniacal obsession – that everything has to be social, ie public. And if you’re a Facebook user and don’t like that – well, tough.

So we now have another powerful media company with a shareholding structure that renders its charismatic, single-minded founder immune from shareholder pressure. Remind you of anyone? Hint: it begins with “News”.

So what exactly did Facebook buy for a billion dollars?

This morning’s Observer column.

So Facebook has bought Instagram, a company with a single product – a photosharing app – for $1bn in cash and (FB) shares. Just to put that in context, Instagram has been in existence for 18 months, employs 13 people, has 30 million users and has had a grand total of $7m in investment funding. Oh, and it has precisely zero dollars in revenue.

Sound familiar?

There’s been lots of really interesting commentary about the Instagram deal. Writing in the FT, John Gapper made two interesting points:

  • The deal looks much more like the kind of thing companies do after they go public and start to run out of steam. The fact that Instagram was snapped up (if that is the right way to describe paying a billion dollars for something) is a measure of how scared Mark Zuckerberg has become of what might happen to facebook.
  • What’s he scared of? Well, says Gapper, scared of repeating the fate of many earlier Internet poster-children (like Bebo, for which AOL paid $850m in 2008 and flogged off in 2011 for $10m).
  • And Frederic Filloux, one of my favourite commentators, is also sceptical about the deal — and about facebook generally. “When I read the news of the Instagram acquisition”, he writes, “I wondered: Imagine Facebook already trading on the Nasdaq; how would the market react? Would analysts and pundits send the stock upward, praising Zuckerberg’s swiftness at securing FB’s position? Or, to the contrary, would someone loudly complain: What? Did Facebook just burn the entire 2011 free cash-flow to buy an app with no revenue in sight, and manned by a dozen of geeks? Is this a red-flag symptom of Zuckerberg’s mental state?”

    Other points Filloux makes:

  • Zuckerberg controls 57% of facebook shares, and therefore can do what he likes. This can be a mixed blessing.
  • Zuck is beginning to look like Bill Gates in the early years of Microsoft’s dominance — the years when he decided that Netscape had to be eliminated. Every challenge is seen as a potential threst. Only the paranoid survive, etc. etc. Facebook’s photo-sharing dominance was beginning to leak, and Instagram was one factor in that. So it had to be acquired or destroyed. “With this transaction”, writes Filloux, “the ultra-dominant social network acted like an elephant scared of a mice. Instagram has 35 million users? Fine. But how many are using the service more than occasionally? Half of it? How many are likely to switch overnight to a better app? Most likely many will. Especially since Instagram is not a community per se, but a gateway to larger ones such as Twitter and Facebook.”
  • LATER: Andy Baio has made an interesting attempt to work out an empirical rationale for the price Zuckerberg paid for his new toy.

    The case against the Digger — by the Digger

    Craig Murray nails it.

    By their own admission, the Murdochs’ media empire is too large for effective corporate governance. The fact that Rupert, James and Rebekah claim they had no idea who authorised thousands of illegal phone hacks, and had no idea who authorised tens of thousands of pounds of bribes to policemen, and still say they have no idea even after all the hullabaloo, is positive proof that such concentrations of media ownership become unaccountable and should be banned by law.

    They are condemned from their own mouths, by the line of defence they have chosen. Whether it is true or not doesn’t matter in terms of the policy that must be adopted – the prevention of multiple media ownerships.


    So will the Digger have to swear on the Bible on Tuesday?

    The Telegraph thinks that he might.

    According to Erskine May, which sets out rules governing Parliament, The Parliamentary Witnesses Oaths Act 1871 “empowers the House of Commons and its committees to administer oaths to witnesses, and attaches to false evidence the penalties of perjury”.

    It says: “Where evidence is not given upon oath, the giving of false evidence is punishable as a contempt. It is not usual, however, for select committees to examine witnesses upon oath, except upon inquiries of a judicial or other special character.”

    Paul Farrelly MP,a Labour member of the committee, told The Daily Telegraph: “We will take advice on Tuesday morning from clerks whether we will require them on this occasion to take testimony under oath.

    “That power is available to the committee but it is rarely used and what is appropriate on this occasion given the misleading evidence to this inquiry from News International.”

    The Wall Street Fox

    Joe Nocera on the Foxification of a once-great newspaper.

    As a business story, the News of the World scandal isn’t just about phone hacking and police bribery. It is about Murdoch’s media empire, the News Corporation, being at risk — along with his family’s once unshakable hold on it. The old Wall Street Journal would have been leading the pack in pursuit of that story.

    Now? At first, The Journal ignored the scandal, even though, as the Murdoch biographer Michael Wolff pointed out in Adweek, it was front-page news all across Britain. Then, when the scandal was no longer avoidable, The Journal did just enough to avoid being accused of looking the other way. Blogging for Columbia Journalism Review, Dean Starkman, the media critic, described The Journal’s coverage as “obviously hamstrung, and far, far below the paper’s true capacity.”

    On Friday, however, the coverage went all the way to craven. The paper published an interview with Murdoch that might as well have been dictated by the News Corporation public relations department. He was going to testify before Parliament next week, he told the Journal reporter, because “it’s important to absolutely establish our integrity.” Some of the accusations made in Parliament were “total lies.” The News Corporation had handled the scandal “extremely well in every way possible.” So had his son James, a top company executive. “When I hear something going wrong, I insist on it being put right,” he said. He was “getting annoyed” by the scandal. And “tired.” And so on.

    In the article containing the interview, there was no pushback against any of these statements, even though several of them bordered on the delusional. The two most obvious questions — When did Murdoch first learn of the phone hacking at The News of the World? And when did he learn that reporters were bribing police officers for information? — went unasked. The Journal reporter had either been told not to ask those questions, or instinctively knew that he shouldn’t. It is hard to know which is worse. The dwindling handful of great journalists who remain at the paper — Mark Maremont, Alan Murray and Alix Freedman among them — must be hanging their heads in shame.

    #hackgate and David Cameron

    One of the side-effects of the Digger’s PR-driven ‘conversion’ has been to divert attention from David Cameron’s role in the scandal. He’s up to his neck in it too, so it’s nice to see that the Daily Telegraph isn’t letting go.

    The Prime Minister has also done his best – unsuccessfully – to deflect attention from the fact that he spent Christmas with Mrs Brooks and her husband, and that Mr Coulson visited Chequers as recently as March. In addition, he is planning a long-term diversionary strategy that could impose state regulation on all newspapers, including those that, unlike the News International titles, did not shower him in hospitality.

    Nero recants. Oh yeah?

    The front cover of today’s UK edition of The Economist.

    Now let me get this straight.

    1. Yesterday, July 14, the Digger gave an interview to the Wall Street Journal (one of his media properties) in which he declared that News Corporation has handled the #hackgate crisis “extremely well in every way possible,” and had made just “minor mistakes.”

    2. Today, July 15, he meets the parents of Milly Dowler, the murdered teenager whose mobile phone was hacked by his goons. According to the Daily Telegraph report of the meeting,

    The media mogul held his head in his hands as he repeatedly apologised to Milly’s parents Sally and Bob and sister Gemma and said “this never should happened”, the family’s lawyer said.

    Speaking outside the central London hotel where the hastily-arranged meeting took place, Mark Lewis said: “He was humbled to give a full and sincere apology to the Dowler family.

    “I don’t think somebody could have held their head in their hands and said sorry so many times.”

    What links these two contradictory stories?

    Simple. On June 14, News Corporation hired Edelman, a global PR company, to try to dig the Murdochs out of the hole they were busily excavating for themselves. As NBC Chicago reports it:

    A large public relations firm co-based in Chicago has been hired by Rupert Murdoch’s News Corporation to help it manage its way through the ongoing phone-hacking scandal.

    “Edelman has been retained by the Management and Standards Group at News Corp to provide communications support and Public Affairs counsel,” confirmed Cheryl Cook, the agency’s Executive Vice President and Director of Media Services.

    No U.S.-based Edelman office will be doing any work for News Corp. All activity will be come from Edelman’s London office, said Cook.

    The hypocrisy implicit in the Digger’s volte face is staggering. But what is truly nauseating is the way the Dowlers are being exploited by the Murdochs for the second time. First their daughter’s phone is hacked by News Corporation’s employees in order to increase sales of his publications. Now they are being used as passive stooges for the Digger’s PR-driven ‘fightback’.

    It’s pass-the-sickbag time, folks. It’s hard to imagine anyone being taken in by this cant. But then an awful lot of people used to buy The News of the World.

    So why did Old Crone quit?

    It seems that Tom Crone, who has been News International’s chief lawyer for over 25 years, has quit. Two questions arise from this unexpected development: 1. why did he go now? and 2. What role did he play in the hush-money payments to Gordon Taylor and Max Clifford (the ones that James Murdoch he authorised without knowing the full story)?

    “Whether he jumped or was pushed still isn’t clear”, writes the Christian Science Monitor.

    But his role at the paper, particularly in a decision three years ago to pay large out-of-court settlements to two men whose phones were hacked into by the company’s employees, is sure to be under scrutiny in the coming weeks and months.

    Mr. Crone told Parliament in 2009 that he’d recommended and approved a $1 million settlement paid to Gordon Taylor, the head of the Professional Football Association, whose phone had been illegally hacked by NotW reporters. Colin Myler, then NotW editor, told Parliament that he, Crone, and James Murdoch collectively decided to make that payment. That hearing came after The Guardian newspaper broke the story of the paper’s payments. Celebrity publicist Max Clifford also reportedly received a settlement of over $1 million.

    That has raised tantalizing questions about how much James knew about the illegal practices at NotW – both during his time at News International and before.