Facebook IPO Post-Mortem


The much-anticipated Facebook IPO has come and gone. In terms of optics, it was a flop. The stock closed barely above the offering price and so failed to exhibit the "pop" that it was supposed to deliver. Google, in contrast, saw its stock price rise 18 percent on the first day of trading in 2004.

Still, that 18 percent rise left Google valued at $28 billion. Today's trading left Facebook valued at around $100 billion. In this sense, the wisdom of the crowd has deemed Facebook a much better bet than it deemed Google eight years ago.

Before the IPO, I argued that Facebook is indeed a better bet than Google was, because it has such powerful positive network externalities. That is, it's a product whose attractiveness depends heavily on how many people are using it--and lots of people are using it. In contrast, the value of Google's search engine has almost nothing to do with how many people are using it. So it's easier for a rival to start small but still overtake it.

Many readers found my argument unconvincing. Stefan Sohlstrom wrote: "When Facebook was first entering the market, gobs and gobs of positive network externalities were all huddled around a site called MySpace. The pull of positive network externalities is far outweighed by superior product offerings and, in some cases, novelty."

Yes, MySpace, much more than Google, had positive network externalities. But the high point of its user base was around the 100 million mark. Facebook now has around 900 million users, and they average 20 minutes of use a day. So I still contend that, when you combine the power of Facebooks' network externalities (as compared with, say, Google's) with the size of its network (which dwarfs MySpace's) you get a network externality oomph unmatched by any other company in the history of IPOs.

I take Sohlstrom's point that positive network externalities aren't enough. You have to have a sound strategy as well.

But here we've already seen some impressive things from Facebook. Unlike MySpace, Facebook saw early on the value of allowing other companies to develop apps for its platform. This in turn created another kind of positive network externality, more akin to the externalities that operating systems like Windows or iOS or Android enjoy: the more users the network has, the more apps it will offer.

Even more creative was Facebook's "Connect" program. It's the reason that, near the top of this page, you see the Facebook icon, which you can click to tell your friends what a wonderful post you're reading. (I'll pause now while you do that...) It's also the reason you now see the Facebook icon everywhere else on the web, too.

This feature, like opening the Facebook platform to outside apps, further increases positive network externalities. It makes it even truer than before that, the more people there are on Facebook, the easier it is for you to tap other people's brains to find out what's worth reading on the web.

Has Zuckerberg committed blunders? Yes, I think "frictionless sharing"--which I skewered here--is an example. In addition to annoying people who hadn't realized their reading habits were being broadcast, frictionless sharing makes Facebook a less valuable place to find out what's worth reading on the web; frictionless sharing happens before your friends have read and evaluated something, rather than after they've read it and decided it's good--so you're no longer benefiting from their judgment.

But the unprecedented positive network externalities Facebook enjoys mean that the company has plenty of time to recover from mistakes like this. People who get disenchanted with Facebook have nowhere else to go unless they want to move to a much smaller network--which, thanks to the logic of network externalities, is a less valuable network, a network they're not inclined to move to.

It's certainly possible that some unimagined "disruptive" technology could undermine Facebook. And I realize that it's inherent in the nature of disruptive technologies that not many people see them coming. Still, I'd take the disruption prospect more seriously if someone could get give me a plausible, step by step scenario in which an aspiring rival--even a very well-financed rival that already has valuable assets on the web--could successfully invade Facebook's turf.

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Robert Wright is the author of, most recently, the New York Times bestseller The Evolution of God and a finalist for the Pulitzer Prize. He is a former writer and editor at The Atlantic. More

Wright is also a fellow at the New America Foundation and editor in chief of Bloggingheads.tv. His other books include Nonzero, which was named a New York Times Book Review Notable Book in 2000 and included on Fortune magazine's list of the top 75 business books of all-time. Wright's best-selling book The Moral Animal was selected as one of the ten best books of 1994 by The New York Times Book Review.Wright has contributed to The Atlantic for more than 20 years. He has also contributed to a number of the country's other leading magazines and newspapers, including: The New Yorker, The New York Times Magazine, Foreign Policy, The New Republic, Time, and Slate, and the op-ed pages of The New York Times, The Washington Post, and The Financial Times. He is the recipient of a National Magazine Award for Essay and Criticism and his books have been translated into more than a dozen languages.

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