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The Economics of Facebook, and 'The Hacker Way'

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Neotenic
910014.  Fri May 18, 2012 3:23 am Reply with quote

OK, this is as much of a placeholder as anything else, as I don't really have the time to properly get into this right now - but I have been having a quick skim this morning through Facebook's IPO prospectus.

Because that's the kind of hip and happening guy I am.

If anyone else is interested, it can be found here.

The first thing that leaps out at me is, probably unsurprisingly, advertising makes up around 85% of it's revenues, which were shy of $4 billion. However, it is interesting to note that the non-advertising revenue is growing much faster than the ad revenue - and a significant chunk of this revenue comes via Zynga apps like Farmville.

Additionally, the firm are already sitting on nearly $4 billion in cash or near-cash. Pretty much the main reason for an IPO is to raise money for further investment, so I do wonder what they plan to do with all the cash they get flowing in from this offering.

But, aside from the numbers, buried deep in the report I found this little section that gives some insight into the internal culture of Facebook. I think it's quite illuminating, and I'm quite surprised we haven't really heard much about it previously.

Quote:
The Hacker Way

As part of building a strong company, we work hard at making Facebook the best place for great people to have a big impact on the world and learn from other great people. We have cultivated a unique culture and management approach that we call the Hacker Way.

The word “hacker” has an unfairly negative connotation from being portrayed in the media as people who break into computers. In reality, hacking just means building something quickly or testing the boundaries of what can be done. Like most things, it can be used for good or bad, but the vast majority of hackers I’ve met tend to be idealistic people who want to have a positive impact on the world.

The Hacker Way is an approach to building that involves continuous improvement and iteration. Hackers believe that something can always be better, and that nothing is ever complete. They just have to go fix it — often in the face of people who say it’s impossible or are content with the status quo.

Hackers try to build the best services over the long term by quickly releasing and learning from smaller iterations rather than trying to get everything right all at once. To support this, we have built a testing framework that at any given time can try out thousands of versions of Facebook. We have the words “Done is better than perfect” painted on our walls to remind ourselves to always keep shipping.

Hacking is also an inherently hands-on and active discipline. Instead of debating for days whether a new idea is possible or what the best way to build something is, hackers would rather just prototype something and see what works. There’s a hacker mantra that you’ll hear a lot around Facebook offices: “Code wins arguments.”

Hacker culture is also extremely open and meritocratic. Hackers believe that the best idea and implementation should always win — not the person who is best at lobbying for an idea or the person who manages the most people.

To encourage this approach, every few months we have a hackathon, where everyone builds prototypes for new ideas they have. At the end, the whole team gets together and looks at everything that has been built. Many of our most successful products came out of hackathons, including Timeline, chat, video, our mobile development framework and some of our most important infrastructure like the HipHop compiler.

To make sure all our engineers share this approach, we require all new engineers — even managers whose primary job will not be to write code — to go through a program called Bootcamp where they learn our codebase, our tools and our approach. There are a lot of folks in the industry who manage engineers and don’t want to code themselves, but the type of hands-on people we’re looking for are willing and able to go through Bootcamp


Fascinating. I'll dig more into it when I'm not actually supposed to be doing something else.

 
Oceans Edge
910046.  Fri May 18, 2012 7:03 am Reply with quote

Yep that's FaceBook, and most of the user bitches in a nutshell - don't care if it works - just get something out that changes something.

Yes, as a culture its a good development strategy - but as a live entity it won't make your end users happy

 
dr.bob
910069.  Fri May 18, 2012 8:56 am Reply with quote

Neotenic wrote:
If anyone else is interested, it can be found here.


Nah, you're all right.

Neotenic wrote:
Additionally, the firm are already sitting on nearly $4 billion in cash or near-cash. Pretty much the main reason for an IPO is to raise money for further investment, so I do wonder what they plan to do with all the cash they get flowing in from this offering.


Presumably build a solid gold statue of Mark Zuckerberg that reaches to the Moon.

Or something.

My favourite facebook IPO story is this one.

 
Neotenic
910072.  Fri May 18, 2012 9:06 am Reply with quote

Yeah, there's lots in the papers I'm seeing about how much people will 'earn' from the IPO - Bono features fairly heavily in most of them.

But it is worth pointing out the subtle distinction that the IPO, in and of itself, does not earn any external shareholder anything - what it does, however, is provide the mechanism through which these shareholders could earn something, but only by selling their shares.

I think it's fairly safe to assume that, certainly in the initial frenzy, Facebook's shareprice is only going to go in one direction. So, with that in mind, it may well be utter madness for anyone to sell their holdings on day one at around $38 each, when who knows what they will be worth a month from now?

Of course, the kind of stratospheric growth in the share price that we are likely to see in this initial feeding frenzy most certainly will not last forever - and then the question becomes whether the company can maintain that inflated price on an ongoing basis, or whether it will slump back down again as the excitment fades and the novelty wears off.

 
suze
910093.  Fri May 18, 2012 10:53 am Reply with quote

So the thing to do is to sell - but not just yet.

When Google hit the stock market in 2004, the stock was offered at $85. It peaked at $742 three years later, but my guess would be that Facebook will reach its peak sooner than that. (This guess does not constitute investment advice, which it would be horribly illegal for me to give.)

One way to proceed would be to watch what Warren Buffett does. Only thing is, he's not currently an investor in Facebook and doesn't even use it. What's more, he rarely-to-never buys stock at IPO, and in any case he's just bought a whole load of newspapers. So we can't do that.

Much as he does use Facebook, the noises coming from George Soros's organization suggest that he isn't planning a major investment either - he seems to be keener on energy companies than tech companies at present.

 
Neotenic
910097.  Fri May 18, 2012 10:59 am Reply with quote

I think it is highly unlikely that Warren will go anywhere near Facebook stock under any circumstances.

Generally, he considers tech stocks to be outside his 'circle of competence', and if he can't understand the business, he won't invest, even if that means missing out on potentially huge gains - not worth the risk, in his book.

I think its worth remembering that, back in the day, one of the big uncertanties around Google being a viable business as well as an excellent search engine was precisely how they would monetarise the business. This is exactly where Facebook are right now. Considering the vast numbers of Monthly Active Users, the actual revenues - though not to be sniffed at - are actually rather low.

Google had the genius idea of keyword auctions, and they were set for life. If Mark & Chums can come up with a similar method of raising revenue, that manages to be lucrative without being intrusive, then the sky will be the limit for them.


Last edited by Neotenic on Fri May 18, 2012 11:03 am; edited 1 time in total

 
exnihilo
910100.  Fri May 18, 2012 11:02 am Reply with quote

Would that everyone else thought that way, might result in fewer bubbles.

 
Neotenic
910102.  Fri May 18, 2012 11:04 am Reply with quote

Ironically, if more people thought like Warren, he wouldn't have been nearly as successful.

 
Leith
910165.  Fri May 18, 2012 3:03 pm Reply with quote

Neotenic wrote:
Quote:
The Hacker Way

...


Fascinating. I'll dig more into it when I'm not actually supposed to be doing something else.


I remember stumbling across that when I first signed up to Facebook, Neo. My reading is that he's essentially describing Agile Software Development, but with some of the general principles applied at corporate level in addition to project level.

The approaches it advocates (adapting to changing requirements through rapid prototyping and frequent iteration, supported by heavily automated testing and version control) have proved useful and become increasingly well established in the software industry, particularly over the last ten years or so. They've tended to work best in small teams, though, so it's interesting to see an attempt to maintain that agility across a much larger organization.

I assume Mark Zuckerberg is being deliberately controversial in using the term "hacker". It certainly is used in a different sense within the software industry to outside it, but is as frequently taken to mean "unskilled amateur" as it is to mean "hands-on innovator" (in my experience, at least).

The motto of "move fast and break things" that he cites elsewhere in the letter is an interesting one. Maybe a good way to maintain a competitive edge and be quick to take advantage of new opportunities. Perhaps a less inspiring ethos for those concerned with Facebook's ability to maintain critical functions like, say, effective data security, though.

 
aTao
910170.  Fri May 18, 2012 4:14 pm Reply with quote

Getting a bit hacked off about systems I use being constantly hacked about. Quite frankly rapid deployment of half-baked prototyping will kill functionality.

 
exnihilo
910239.  Sat May 19, 2012 6:15 am Reply with quote

Neotenic wrote:
Ironically, if more people thought like Warren, he wouldn't have been nearly as successful.


In the sense that if they had made exactly the same investment choices. What I meant was if more people would stick to investing in industries they had half a clue about instead of shovelling money at whatever overhyped crap happens to be shiny that week.

 
Neotenic
910632.  Mon May 21, 2012 3:58 am Reply with quote

Quote:
The motto of "move fast and break things" that he cites elsewhere in the letter is an interesting one. Maybe a good way to maintain a competitive edge and be quick to take advantage of new opportunities.


Yes, I'd go along with that. 'Done is better than perfect' sounds lovely in abstract, but when the imperfections can impact on nearly a billion people, I guess the approach may be a little flawed.

Admittedly, the impact of people not being able to fully access their Facebook profile in the ways they would like does not have quite the same level of materiality as planes falling out of the sky, but it should still give them pause for thought.

One of the random-people-stopped-in-the-street-in-lieu-of-talking-to-experts I saw on the news over the weekend felt that Facebook was a good buy 'because they ran Myspace out of business' - and, if anything, that is one of the reasons I would personally be reluctant to invest in Facebook.

I'm sure I can't be the only one who has a completely dormant Myspace profile - so dormant, I've completely forgotten the password for it. And there is absolutely no guarantee that my Facebook profile won't have joined it in five, or maybe ten, years time.

Almost all of Facebook's intrinsic value comes from the fact that hundreds of millions of people look at, and contribute to, the site's content every month. If these numbers evaporate, so will the share price.

Admittedly, any new entrant to social networking has a mighty big hill to climb to break what is becoming an effective duopoly with Facebook and Twitter, which are both different enough to co-exist, and a great many people have invested time and emotion in their profiles and social connections on both platforms - but being difficult is not impossible. Even if success in this field does rather seem to be eluding Google+.

I basically set up my Facebook page when I felt I was missing out on stuff by not having one - I don't really feel that with Google+ at all. After an initial handful, I don't even get invitations to friend anyone on Google+ any more.

So, at least for the time being, Facebook is probably quite safe in its dominant position - but the defences it has to maintain that position are far from future-proof at this stage. User loyalty, in particular is fickle and capricious, and a trickle of leavers can easily become a flood if it goes viral.

But either way, I think anyone who looks at the amounts that early Facebook shareholders are now worth, and thinks that level of success can be replicated by buying the shares on the open market is likely to be sadly mistaken.

 
Neotenic
910637.  Mon May 21, 2012 4:48 am Reply with quote

Oh, bless.

I was just having a quick look at the FT website, to see how the markets reacted to the flotation more generally, and I found a little petition in the comments to a story.

The basic thrust is that the petition is to demand that five shares be given to every Facebook user, "for their effort to upload their private content and build relationships which will be used by Facebook to deliver advertising campaigns for large corporates."

Which, of course, is how I came to earn shares in Google, ITV and any number of companies that derive some or all of their revenues from advertising. No, wait.....

The petition author wants to "get 10 million signatures and show to Mr Zuckerberg the power of Fair Social Media" - so far, he's manged to get 16.

As I say, bless him.

 
dr.bob
910654.  Mon May 21, 2012 5:59 am Reply with quote

Neotenic wrote:
Yes, I'd go along with that. 'Done is better than perfect' sounds lovely in abstract, but when the imperfections can impact on nearly a billion people, I guess the approach may be a little flawed.


It depends on your definition of "Done".

I know a lot of IT people and I imagine most of you would be unsurprised to learn that many of them show signs of being slightly autistic. They're generally the kind of people who will write a piece of software to do a particular job and, despite the fact that the software works perfectly well, they will then spend another 200% of the development time making sure that they use some devilishly clever algorithm to ensure that it runs 0.5% more efficiently.

When I read 'Done is better than perfect' I took it to mean that you should release something when it works properly, not wait until it's as efficient and clever as you can possibly make it.

Neotenic wrote:
But either way, I think anyone who looks at the amounts that early Facebook shareholders are now worth, and thinks that level of success can be replicated by buying the shares on the open market is likely to be sadly mistaken.


I think you can also say that anyone who looks at the amounts that early Facebook shareholders are now worth, and thinks that level of success can be replicated by starting their own IT company is likely to be sadly mistaken. But you can bet there'll be a lot of people thinking of it.

 
Neotenic
910693.  Mon May 21, 2012 8:42 am Reply with quote

Quote:
When I read 'Done is better than perfect' I took it to mean that you should release something when it works properly, not wait until it's as efficient and clever as you can possibly make it.


Yeah, that probably is a more sensible interpretation of it.

I guess then it's a case of watching whether people are changing things that need to be changed, or just changing things because it is the volume of changes they make that keep them in a job.

Quote:
I think you can also say that anyone who looks at the amounts that early Facebook shareholders are now worth, and thinks that level of success can be replicated by starting their own IT company is likely to be sadly mistaken. But you can bet there'll be a lot of people thinking of it


Sure - but I think it is fair to say that pretty much anyone who does anything where their primary motivation is making pots of cash is far more likely to fail than succeed, certainly over the long-term.

I think it is reasonable to assume that the most conspicuously successful entrepreneurs would still be doing what they made their fortunes doing even if they hadn't found a way to turn that something into untold riches.

If, for example, Sergei and Larry hadn't been able to convince early investors of the merits of their little search engine, it could still just be a quirky little curiousity, used by a small band of acolytes but largely ignored by the masses funneling all their seaches into Yahoo or Bing (or whatever Microsoft would have come up with without Google to compete with)

Indeed, imagine if all that investment cash had made its way to the developers of Wolfram Alpha, rather than the nascent Googleplex - the internet would be a very different place indeed. But Sergei and Larry would probably still be doing their thing in it, just in rather cheaper shoes.

People aiming to 'get rich quick' often fail - but when they do succeed, I think it's fair to say that they are every bit as likely to 'get poor quick' with the same degree of speed as they are to sustain their successes.

 

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