Derek Thompson

So says Bloomberg, after matching the biggest tech IPO of all time against its rivals from the last ten years. Here's the proof:

This is an interesting and superlative fact about Facebook, which is an interesting and superlative company with an interesting and superlative IPO. That makes it news. But it doesn't make it indicative of anything about Facebook except that the IPO price turned out to be high.

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Facebook's IPO flop is a fascinating story. But in the long-run, the last seven days are probably irrelevant to the success of the company, which depends on whether Facebook builds a business model that does not exist right now. Our valuation source Espen Robak put it perfectly last week: "If Facebook's profit model stays the same, this [stock price] doesn't make any sense."

The fact that Facebook is still trading at 60-times its earnings (for perspective: Google trades closer to 15) suggests the market consensus is that Facebook's profit model will change. But how? I've spoken with a few people from the social media world who say the company is such an essential component of the Web architecture and our online experience that it could simply start bullying consumers into paying -- e.g.: $1 for each human to access the site and $100 per company to use "like" buttons. Facebook has 900 million users. If each paid a dollar this year, that would nearly equal last year's profit.

Okay, so those aren't so much business ideas as illustrations of the kind of power we're meant to believe Facebook has. (They are, in fact, horrible ideas. Can you imagine the popular uproar if Facebook announced that it would charge subscriptions? Or the freak-out on Wall Street that Facebook was so desperate to show it could make money it was actually thinking about a social media pay-wall? Disastrous.) But this might be a more reasonable illustration: Companies, investors, and individuals using Facebook's ginormous pool of social information to make investment decisions:

Using status updates from U.S. users, Facebook's data team has constructed a daily measure of America's mood--an index of gross national happiness. There is a long literature on how people's mood affects the market (yes, sunnier days in New York City are better for stocks), so Yigitcan Karabulut, a graduate student at Goethe University Frankfurt, decided to examine the link between Facebook's GNH index and share prices.

What Mr. Karabulut found was that GNH didn't seem to merely move up and down with the stock market, but to predict it: A bump up in people's sentiment one day tends to lead to a statistically significant increase in returns the following day.

Today, Facebook makes more than 90 percent of its revenue from online ads and Zynga games. It's conceivable that, as online ad revenue might never quadruple on a per-user basis, Facebook builds a big-data platform that skims aggregated information off its user base and sells the results as a financial service. That's a vision of Facebook, big-data service provider. I don't know if it makes any sense. But it's a vision.

Last Friday, I spoke with Espen Robak, the president of Pluris Valuation Advisors and an expert on valuing large private companies, just minutes before Facebook's stock was scheduled to trade publicly for the first time ever.

You know what happened next: Glitch, snitch, and flop went the IPO. What the heck happened? I caught up with Robak for the post-mortem of the public offering. Here's an edited transcript:

Well, that was disappointing. Has the Facebook IPO fallout shocked you?

I wouldn't say I'm terribly surprised. This was always an uncertain valuation and an uncertain investment. And the stock price hasn't really moved that much, when you think about how much of a crap-shoot this valuation was going to be. That would be my take.

That's a pretty calm reaction for the biggest tech IPO of all time falling 25 percent from its opening price!

Well, obviously, most people were assuming that Morgan Stanley and Facebook would have managed the IPO price to produce much more of a pop for it to continue trading up. But this is not easy to guess. You look at what happened to LinkedIn, which popped more than 100%, and that was clearly a substantial undervaluation.

You said Friday that private Facebook stock was trading in the low 40s in the secondary market, and that those investors probably expected the stock to be in the low-50s in six months. Explain that again to me.

When you buy something that you know is going to be illiquid -- and these people couldn't trade Facebook stock for 180 days after the IPO -- you want to give it a little bit of a haircut. The people who bought private Facebook stock in the 40s  were buying illiquid stock. They thought the so-called "fully liquid" version would be worth significantly more. That would take you into the low 50s. But actually, the price of privately traded Facebook shares went a little down before the IPO.

But by and large, most of the transactions in April were in the low 40s. So, yes, you would expect that these investors were unpleasantly surprised.

I'm reading some very smart economic writers who're blasting Facebook and the banks for letting big institutional traders gobble up all the value in Facebook, then setting the IPO price too high, and then screwing over retail investors who bought stock at $42 at the opening and immediately saw their investment fall by 25%.

But after LinkedIn's IPO, I read some very smart economic writers who blasted the banks for setting the IPO price too low and for screwing over the entrepreneurs. 

I'm really happy you said that, because I've had the same idea. This is an interesting thought experiment. What if Facebook had popped. What if Facebook debuted at $15 and popped to $35? Nobody would be complaining about the forecasts, or the Nasdaq glitch, the various things that went on. The CFO of Facebook, the analysts at Morgan Stanley, the tech guys at Nasdaq -- none of them would be in hot water now. So it reemphasizes for me that the IPO process is a somewhat delicate undertaking for everybody: for the company, for the underwriters, for everybody involved. Ideally you want to be right, but it pays to be low.

What do you think about the current accusations that Facebook leaked information to their underwriters, who shared it exclusively with big investors?

I have no idea. It's really not my place to say.

Is it fair to say we were all too optimistic a week ago?

I think people might have been over-excited about it, yes. It's not easy to price private companies since so much of the value is dependent on things that are going to happen in a year. The very nature of a company like this is highly speculative.

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The triumph of women in the American office place has been perhaps the greatest economic story of the last century. In 1900, only 19 percent of women participated in the labor force. In 112 years, that number has tripled, and just a few years ago, there were more officially employed women than men in the United States.

But the rise of working women has been much slower around the world. Here's a graph, via the International Labor Organization, comparing the gap between youth male and female participation rates around the world in 1991, 2001, and 2011. Worldwide, the gap has barely budged. In South Asia, it's still terribly high. In East Asia, the gap is totally inverted: women are officially working more than men.

What's going on here?

Sometimes the biases behind these gaps are purely institutional. In Sudan, for example, women still lack access to bank accounts, and in Yemen, it is illegal for women to leave the home "without permission from a male family member or an escort," according to the Economist Intelligence Unit.

In some cases, the gap is cultural. The women don't expect to work because their mothers didn't work, or because the national values don't emphasize employment as a "female" virtue. In Pakistan, for example, male participation rates are among the highest in the world, but less than "one out of five young Pakistani women participates in labor markets, which primarily seems to reflect cultural barriers to female labor force participation."

But some of the most interesting barriers are economic. In underdeveloped economies with large informal sectors (such as families selling their wares at bazaars), a strong economy ironically pushes women out of the workforce because the men find that their income alone can support the family. (Studies of countries in South Asia have often found that when household income goes up, female participation goes down, according to the ILO.) The introduction of a manufacturing sector -- an essential part of any country's industrialization -- overwhelmingly benefits men, opening up a wider gap between male and female employment and earnings.

As a result, female participation rates don't rise in a straight diagonal line like we tend to see in most positive trends. Instead, it follows a funky U-shaped pattern, with high female participation rates in many struggling countries, low participation rates as manufacturing transforms the economy, and higher participation rates as the service sector develops. This helps to explain why extremely strong economic growth in South Asia has done little to reduce gender gaps, even though the gap has declined relatively strongly in the slower-growing Middle East.

Growth is a requirement for the betterment of women's (and men's) lives everywhere. But the international road to equality through growth is loopy.

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New studies -- including a report on the happiest countries on the planet -- suggest that building a theory of "happynomics" is harder than you'd think


Economists can measure unemployment, GDP growth, and housing prices. But do they know how to measure happiness? If they did, what would we even do with the results?

Each year, the OECD produces the Better Life Index, a comprehensive report on the well-being of advanced countries based on a long list of factors, including income, housing, and life satisfaction. In the 2012 survey released this week, Australia took the top spot. The U.S. finished third.

Does that mean Australia is objectively the best place to live in the world? Absolutely not. Even the architects of the index would tell you that the "good life" is utterly subjective, and different people have different values. If you equally measure income and work-life balance (two real metrics in the OECD study), you assume that everybody in the world values money and down-time the same. In the real world, some people like smaller houses, some prefer long vacations, and some choose to work in banking because they like having money and don't care for down-time.

The nice thing about the Better Life Index is that it lets users weight the 11 metrics to emphasize the values that matter most to you. When I emphasized income, housing (e.g.: rooms/person and dwelling size), and jobs (e.g.: employment, long-term unemployment), the United States came out way ahead. From these metrics alone, we really might be number one.
 

But when I lowered those metrics and instead emphasized community (via surveys on quality of support network), life satisfaction (via surveys) and work-life balance (e.g.: time devoted to leisure), Denmark moved from number 15 in the world to the runaway winner. The United States fell from number one to number 18. Only Switzerland and the Netherlands hung around in the top five. Australia, the overall winner, didn't even appear in the top seven in either list.


The OECD's metrics are not inscribed by the Almighty on stone tablets. They're just educated guesses about what makes for strong communities a decent environment and so on. But they help to tell an important story: If you want to measure what makes people satisfied, you have to understand what they value. And that is really, really hard work.

DOES HAPPY-ECONOMICS SKEW LIBERAL OR CONSERVATIVE?

The most commonly cited statistic in happiness economics is the rule that somewhere between $40,000 and $110,000, a higher salary doesn't buy much more joy or satisfaction. Many people draw the bright white line at $70,000. This provides a strong utilitarian impulse to raise taxes on the rich, who apparently can't buy much happiness with their extra millions, and to funnel the money to the poor to bring them closer to $70,000.

But that's an awfully blunt instrument for maximizing happiness. But one reason why incomes differ is that some people care more about making money than others.

Take, for example, two equally capable students graduating from the University of Michigan. Student A goes into Acting, because he likes the stage and doesn't mind being poor. Student B goes into Banking, because he likes money and he doesn't mind working 100 hours a week. The federal income tax code will implicitly punish Student B's decision with higher rates and reward Student A with maybe even a net tax credit, even though Student A didn't care about money in the first place. If you nationalize this lesson, it suggests that, in our imprecise efforts to funnel money from the top to the middle, we wind up taking money from people who care overwhelmingly about having a high income and distribute it among people who don't.

"Differences in preferences, not merely ability, play a role in driving the variation in income across individuals," Benjamin Lockwood Matthew Weinzierl write in a fascinating 2012 paper. Some people are rich because they really want to be.

The psychological research backs up the economic wonkery. Here's the great Daniel Kahneman on how kids who want to be rich are more likely to be rich and more likely to be happy about being rich:

[In] a large-scale study of the impact of higher education... young people filled out a questionnaire in which they rated the goal of "being very well-off financially" on a 4-point scale ranging from "not important" to "essential."...

Goals make a large difference. Nineteen years after they stated their financial aspirations, many of the people who wanted a high income had achieved it. Among the 597 physicians and other medical professionals in the sample, for example, each additional point on the money-importance scale was associated with an increment of over $14,000 of job income in 1995 dollars!

The importance that people attached to income at age 18 also anticipated their satisfaction with their income as adults ... The people who wanted money and got it were significantly more satisfied than average; those who wanted money and didn't get it were significantly more dissatisfied.

This might put an arrow in the quiver of those who don't find income inequality much of a tragedy. To a large extent, lower-income people might just be "racing for other finish lines," Bryan Caplan concludes. Maybe Caplan's right, and maybe he's wrong. I doubt either of us knows enough about the preferences of low-income Americans (or any-income Americans) to say for sure what finish lines they're racing for.

The safe conclusion to draw is that good arguments on behalf of income redistribution are complicated by the fact that not all people value income the same way -- just like not all people value community, the environment, and housing size the same way. Happiness is a cake with a million recipes. The same factors that make it so hard for the OECD Better Life Index to compare the "good life" country-by-country make it hard to devise any sort of happiness-centric public policy.

The biggest tech IPO in history is turning into a giant metaphor of greed and hyper-optimism, as bankers and analysts struggle to figure out what went wrong and who to blame.

It wasn't bad enough for Facebook to see its stock cascade by 18% -- or seven points -- since its delayed and disappointing Friday IPO. No, the real story lurks behind the numbers: the disastrous performance of the overwhelmed stock exchange and new rumors that Facebook might have broken the law before its first minute as a public company by leaking exclusive news about its earnings to large banks, who then went ahead and told big investors to sell Facebook at the opening.

First, the glitch. Technical issues with Nasdaq's trading systems delayed the Facebook IPO by two hours. Big deal? Sure is, Nicholas Carlson reported in an exclusive interview with a hedge funder at Business Insider. Nasdaq's slip-up, and its response to traders Monday morning, could have driven the stock down by encouraging big investors to sell. Money quote: "NASDAQ knew its systems were broken before the Facebook IPO, and instead of aborting the offering and facing huge embarrassment, it went ahead. Traders then lost hundreds of millions of dollars as they tried to buy and sell Facebook stock without getting confirmation that their trades had been executed."

Even after Friday's mayhem and Monday's fog, the stock continued to fall through Tuesday. So you can't blame glitches for all of Facebook's slide ... which could always rebound by, say, tomorrow. Stocks do that.

This brings us to the snitch. Here's what we think we know so far, based on reporting by the New York Times, Reuters, and Business Insider.

In the run-up to Friday's IPO, Morgan Stanley's lead consumer Internet analyst cut revenue forecasts for the company. JPMorgan Chase and Goldman Sachs, two other major underwriters, followed. That takes us one step closer to solving the mystery of Facebook's falling stock price: Three huge banks changed their mind about Facebook's immediate future and told institutional investors to back off the stock around $40.

The logical follow-up question is why did all three lead underwriters take the extraordinary step --  one mutual funder: "I've never seen that before in 10 years" -- of cutting their Facebook forecast? One clue might be in Facebook's S-1, which it updated on May 9 (9 days before the IPO).

Based upon our experience in the second quarter of 2012 to date, the trend we saw in the first quarter of DAUs increasing more rapidly than the increase in number of ads delivered has continued. We believe this trend is driven in part by increased usage of Facebook on mobile devices where we have only recently begun showing an immaterial number of sponsored stories in News Feed, and in part due to certain pages having fewer ads per page as a result of product decisions. [my emphasis]

That first sentence is troublesome. Really simply, it says that users are still rising faster than ad revenue, because Facebook is still struggling to figure out how to make money off its contintent-sized audience. But is the sentence really so shocking that the banks would take the nearly unprecedented step of spooking their investors days before an IPO that they were underwriting? Perhaps not.

That's where the snitch theory comes in. Henry Blodget reports that analysts cut their estimates because Facebook told them to -- exclusively. (Not illegal, perhaps. But not cool, either.) "Put differently, the company basically pre-announced that its second quarter would fall short of analysts' estimates. But it only told the underwriter analysts ... not to smaller investors," Blodget writes. Whether it's illegal, extralegal, or just grossly unfair to average investors, we'll let the SEC decide.

The unfairness principle doesn't begin and end with the snitch, John Cassidy argues. It begins with the secondary market, where big investors gobbled up bits of Facebook for cheap and watched their shares bloom before the company went public. Since Friday, the stock has traded sideways, and then down.

The big idea here is that companies are staying private longer, which allows them to soak up up millions and for the market value to top out, leaving little on the table for average investors.* So-called "D-rounds" of late-stage stock offerings are now common for tech companies who'd like the benefits of wide-scale funding without the drawbacks of public disclosure rules. "More to the point," Cassidy says, "they allow hot companies to bid up the price of their stocks well before the investing public gets a sniff." By the time the public gets a sniff, the smart money has already cashed out.

THE LONG GAME

Keep your eye on the bigger picture. Facebook's $100 billion valuation was never about its first-hour pop or its second-quarter earnings. The valuation reflected a belief about the future -- by definition, not reflected in today's numbers -- that the biggest Internet company, as measured by attention, simply had to become the biggest Internet company, as measured by market cap.

"When you're trading at massive multiples, any hint of a slowdown in growth, or of failing to meet pretty aggressive targets, is a key sell signal," Felix Salmon writes. Too true. But, as I'm sure Felix would agree, the implicit assumption behind Facebook's $100 billion valuation was that Mark Zuckerberg, boy-king and chancellor of the social universe, could transcend the drudgery of banner ads-per-user. Facebook is deeper, wider, more media-pervasive, and life-insinuating than every social media company put together. How does that sort of company not become the next Google?! ... is the kind of rhetorical question buyers were asking themselves.

"If Facebook's profit model stays the same, this valuation doesn't make any sense," Espen Robak, the president of Pluris Valuation Advisors, told me on Friday morning, just minutes before Facebook traded publicly for the first time. In one or ten years, Facebook won't be judged by Nasdaq's glitches, or its executives' alleged snitches. It will be judged by the degree to which Zuckerberg meets the historic burden of expectations placed on his company's shoulders.  Hiccups or no hiccups, this was always a bet on something not unlike magic.

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*On the other hand! When LinkedIn's stock popped 100% after its IPO last year, critics blasted the banks for setting that IPO price not too high, but TOO LOW, thus screwing the entrepreneurs out of tens of millions in shares that only blossomed after LinkedIn sold them. This is a good time to reiterate that stocks are bets; analysts are notoriously hyperbolic; and whether an IPO flat-lines or goes to infinity, you can be sure that somebody is allegedly getting a raw deal.

Happy-ish news: Gallup's Economic Confidence Index broke through the glass ceiling of negative-17 for the first time in its four-year history of daily tracking.

The index can go as high as 100, if all respondents say the economy is strong and improving, or as low as negative-100, if everybody says things are bad and getting worse. Its lowest-ever score was 65 below zero, back in late 2008. Its highest ever came this this morning.

Today, 52% of Americans think things are getting worse, and only 15% describe conditions as "excellent" or "good." Ladies and gentlemen: all-time record economic optimism.

"The pursuit of efficiency has long been a hallmark of American economic success," Daniel Gross writes in his great new book Better, Stronger, Faster. And he's right. Some of the great triumphs of American wealth, from the Model T to Amazon shopping, are triumphs of an important kind of efficiency: using technology to do more with less.

For much of the last century, efficiency has been the providence of producers. Companies big and small found innovative solutions to complex problems and cut costs to labor, energy, and global supply chains. But lately, ordinary families are evening the score. We're learning to share more (e.g.: cars), buy less (e.g.: movies and music for the house), and live cheaper. Here, Gross and I discuss the future of the efficient consumer.

THOMPSON: For 30 years, corporations dominated the efficiency game via off-shoring and automating. Now consumers are getting in the game by replacing old products with cheap tech or by sharing goods. What changed?

GROSS: Several things changed, and I definitely trace it back to the onset of the Great Recession. If your top line isn't growing, and your net worth is tumbling, and your ability to borrow against your home equity disappears, you have to start figuring out how to do more with less. So the movement toward consumer efficiency was spurred by necessity. The old personal finance advice - stop buying that latte at Starbuck's and start making coffee at home - actually makes a lot of sense. But the nice thing is that new businesses arose to appeal to the new zeitgeist - Netflix allowing for the rental of movies instead of the purchase, Zipcar, Rent-the-Runway, or Chegg.com, which allows students to rent textbooks online. All of these let people get the same utility without having to go into debt to purchase and take ownership of things.

But standards also make a very big difference. The typical car sold today is significantly more fuel efficient than the typical car sold five years ago. And I'm not just talking about luxury goods like the Prius. I'm talking about entry-level vehicles like the Chevy Cruze. Yes, automakers have responded to persistently high gas prices by working on fuel efficiency. But the higher mileage standards promulgated by the Obama administration lit a fire under the carmakers. In the same way, standards for more efficient light bulbs and appliances wind up helping consumers reduce their operating costs, and boost their operating income. Imagine how much better off (and efficient) the typical American homeowner would be if building codes mandated greater use of more effective insulation.

THOMPSON: Do you think the new consumer efficiency revolution could stem from income inequality -- that our wages are falling behind productivity, so we're using technology to make our money go further?

GROSS: There's something to your point. I'd put Groupon and LivingSocial in the bucket of efficient consumer businesses, and there's no question they've caught on because people need to make their dollars go much further. But of course we've always used technology to make our money go further, regardless of where we are in the economic cycle and what's happening with income inequality. I'm old enough to remember what long-distance phone calls used to cost before MCI came on the scene. Now I use Skype, not because my income has gone down, but because it's cool to get stuff for free and I like being able to see the person at the other end of the call. And in many ways, I think it actually think that it works the other way around.

To a large degree, efficient consumption starts as a luxury good and then trickles down to the rest of consumers. There are a few reasons for that. At the beginning, efficient consumption products - the Prius, solar panels, programmable thermostats, LEDs - are niche products and so have a hard time competing on price with mass-manufactured equivalents that have been around for decades. They're artisanal by comparison. Now think about housing. It's more efficient - and ultimately reduces your operating costs - if you can live close to a train or light-rail station, so you don't have to own a car to get around. But we all know that homes and developments close to transit tend to be more expensive than those that are farther away. In Connecticut and New Jersey, real estate in towns that have direct train connections to New York, tends to cost significantly more than houses in nearby towns that don't have them.

THOMPSON: Family consumption makes up a huge part of GDP. Are efficient consumers bad for the economy? Won't we all be poorer if we buy fewer cars, houses, and clothes?

GROSS: No, I don't think that efficient consumers are bad for the economy, any more than efficient companies are bad for the economy. The great problem we've had in the last several years - and we continue to suffer the after-effects - is that millions of our citizens couldn't afford to meet their financial commitments. The inability of people to keep up with mortgages, credit card loans, and other consumer loans has had disastrous consequences for our financial system, for companies, and for the economy at large. Financial failure begets financial failure. Just so, financial success begets financial success. If we buy 500,000 fewer cars, then a bunch of autoworkers and car dealers will suffer. But if 500,000 people are freeing up the $6,000 a year they would have spent on car payments, taxes, and insurance, and using the proceeds to, say, avoid foreclosure, or stay current on payments, or invest in their own education - that's a significant positive.

There was a great story in the New York Times about a small heating oil company in Maine whose poor clients were suffering horribly, and the difficult choices the owner had to make about whether to deliver fuel to people who couldn't pay. People around the country send in tens of thousands of dollars to help out. The money all went to pay for heating oil. Imagine if the money -and all the public aid those customers had received - went to weatherize leaky trailers and do things that would enable them to reduce their annual fuel consumption by 20 or 30 percent. Next winter, they'd all have much more to spend at local businesses, the heating oil company owner would have a more sustainable business and wouldn't face the same number of wrenching decisions.

THOMPSON: Do you see efficient consumption playing into the export game? If we save more like Germans, will it help us export more like Germans?

GROSS: I don't think so. We're actually quite good at exporting. Monthly exports have risen from $124 billion in April 2009 to a record $186 billion in April 2012 -- up 50 percent. Our 2011 exports were $2.1 trillion -- also a record. The opportunity is really more in how efficient consumption can create new businesses that can then be exported. In other words, if a Zipcar can catch on and gain scale in the U.S., it can quickly expand abroad. Groupon and Living Social are now in dozens of countries. In countries where energy is more expensive, energy-saving products -- like, say, the Nest thermostat -- have the ability to catch on.

THOMPSON: Is consumer efficiency a fad? Is the natural state of the American human to borrow and spend, and we're only "pretending" to like efficiency because we're temporarily overloaded with old debt and flat-lining wages?

GROSS: I definitely think it is cyclical. I've reported through three different recessions. And I"ve either written - or read - the same article about how we've learned our lesson, how a nation of spendthrifts is turning into a nation of penny-pinchers and coupon-clippers. Then once growth returns and credit flows, the coupon circulars go straight into the garbage. There are two factors that may lead efficient consumption to last longer this time around. First, if you read your Reinhart and Rogoff, you'll know that recoveries from debt-induced crises tend to be slow and painful. There will be no return to boom times. People will be working out from under their debt load for a long time. Mortgage equity withdrawal [MEW] - i.e. borrowing against your house to go to the Olive Garden - was a huge factor in spurring consumer spending in the 00s. But given where housing is now, there's not likely to be any MEW for years to come. So consumers will have to live by their wits for the next many years.

The second factor is the proliferation of efficient consumer businesses. There are just many more of them, and many more marketers, executives and lobbyists sitting around thinking of ads, financing mechanisms, subsidies, incentives and business models that will rope people in. The best way to get people to save money on vital goods and services is to create businesses that will profit by helping them do so. If I came and changed all the light bulbs in your house and reprogrammed your thermostat, wouldn't you pay me 20 percentage of your annual savings?

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