An economic bubble can be defined as an overvaluation of a product or asset. In the case of Facebook and its looming IPO (initial public offering) this week, I want to describe three potential bubbles relating to facebook.
First is in the literal sense. By most estimations, Facebook will have the largest IPO in history: $100 Billion. Simply, Facebook stock may simply be overvalued. With an inflated price, a classic bubble burst may be on Facebook’s horizon. The rationale for the inflated value may be because of two social networking bubbles.
Facebook uses each user’s personal information to sell ads. That’s how Facebook makes its money. Their ads are targeted based on users’ likes and clicks; they can sell their ads for a higher price because of the targeted audience. The bubble occurs as more people become fed up by the exploitation of their personal information. Once this practice becomes more common knowledge, I believe there will be an exodus from social networking sites that are simply shills for data gathering.
The third potential Facebook bubble is a mass departure by the people who were Facebook’s initial constituents. Now approaching their thirty-somethings, the college students that Facebook originally targeted may be bored by a decade of the social networking site. Many adults (mainly forty-plus) are only on Facebook because of their children. Maybe the hype will catch up with users who are departing their roaring twenties where sharing everything was a way to connect. Those users are now entering into their adult lives and may no longer feel the need to constantly share or to delve into their friends’ every matter.
Whether Facebook repels users by sharing their information or users finally lose interest in social networking, the company faces many unknowns while it emerges as a public company. While twenty years from now Facebook may be the largest company in the world, if I had to put money on it, I would bet that we all look back and see Facebook as an another instance of a dot-com bubble.