Why Silicon Valley and Wall Street See Facebook So Differently

By Sarah Lacy , written on September 14, 2012

From The News Desk

There's a strange gap between a startup world still mostly bullish on Facebook, which views its declining stock as little more than a temporary set back, and the mainstream media/Wall Street world that views the company is an over-hyped disappointment, gleefully jumping up and down on its premature grave with every headline, throwing its executives under the bus one-by-one, and foolishly suggesting they should be fired. (Never mind those same people lauded the same executives just a few months ago.)

It's hard to think of a time I've seen this big of a disconnect. People in the startup world may root for the likes of Groupon, Pandora and Zynga, but even their venture investors have admitted the stock issues are rooted in those companies' serious problems. And there are plenty of well-wishes for Marissa Mayer to turn around Yahoo, but few can articulate how they think she'll actually do it.

Likewise when a company is undisputedly on top of an Internet wave, it's usually on top on Wall Street too. Netscape, Yahoo, eBay and Google all had their moment in the dual market sun. Amazon may be the closest to being able to relate to what Facebook is going through. It was long counted out by Wall Street before its powerful resurgence in recent years. But back in the days when Wall Street underestimated it, the startup world too was more enamored of eBay.

The other night, I had dinner with Chris Dixon, who straddles both worlds as an entrepreneur and angel investor who lives in the land of hedge fund managers. We got to talking about Facebook, and he offered the best articulation I've heard for this gap. To the world of startups, he said, Facebook is respected, feared, and a source of awe for its immense almost unprecedented power. Meanwhile Wall Street is only looking at the money. And that's the problem: Facebook is monetizing its eyeballs, but it isn't monetizing its power.

"Yet!" say hopefuls at the end of that sentence.

"We'll see," reply the bears.

What makes Facebook so uniquely powerful? No one has ever wired 1 billion people together in the Web in such a personal, intimate, and powerful way, and opened it up to anyone to leverage. Consider the impact Facebook's platform had on Glassdoor, a fairly established Web site that grew users ten-fold in just a matter of months after joining Facebook's platform. And the users were surprisingly high quality.

Glassdoor is hardly alone. The platform gets you instant audience in a more intimate, social way than all the SEO in the world could previously provide, and drags you internationally whether you are ready for not. And unlike paid search ads or the tricky cat-and-mouse games of optimization, it does that above board and for free.

Old people like me and those on Wall Street may have Facebook profiles we visit occasionally, but we're not really Facebook users. In Indonesia -- one of Facebook's biggest user bases -- it's the defacto Web the way Prodigy was in the early days in the US. Email accounts were only surging because people needed an email address to sign up for Facebook, Yahoo executives told me when I reported from the country in 2010.

Likewise, yesterday I told my college-aged babysitter we'd email him the dates we needed him. He looked at us totally confused and just said, "Facebook." I'm a Facebook bull, and I couldn't quite process the reality that he doesn't actually check an email address -- that all of his contacts go through Facebook. That seems about a strange to me as using only Twitter DMs. But my manny isn't alone.

As Kevin Kelleher pointed out this morning, more people seem to be joining the former ranks of the Facebook silent majority. That's a legitimate problem for the company. But even though I don't visit the site everyday, it has done something invaluable for me: Promised to keep me in touch with anyone I've ever met seamlessly and easily. It's hard for me to believe Facebook can't find a good way to make money off that majority too. I don't visit LinkedIn every day either-- in fact at our August PandoMonthly, Reid Hoffman said this had always been a challenge for the site. And yet it's found a way to monetize its power with its freemium model.

Odds are no one will ever do what Facebook has done again. And, as Dixon pointed out, people who see the power of that just find it hard to believe that this is all there is of the business model.

But Facebook bears a lot of the blame for why the non-startup world doesn't get this: Because it is not doing a great job of turning that raw, never-before-seen online power into dollars. Talk about mission all you want, Mark Zuckerberg, dollars are what matter, if you want the cash to build the team to build the products that build the vision.

When Facebook's stock was in the hands of the people who saw that raw power every day as they funded competitors and hangers-on, it was no shock the price was significantly higher than it is now. Facebook has always been valued based on where it was going -- dating back to its heady $100 million valuation when Accel invested. Or as co-founder Dustin Moskovitz said at our May PandoMonthly, he and Zuckerberg were always just a year or two ahead of everyone else's expectations. They got spoiled by a world of startup-minded people who always caught up to them. Public shareholders were the first ones who weren't willing to give Facebook the benefit of what it could be two years from now. They are valuing it based on right now. And right now it's just a big ad business.

As we wrote earlier this week, Zuckerberg and Facebook always hewed to the Google playbook of going public, which was to hold off, build something massive, and finally go public once you were so dominant it could play by its own rules. Facebook did wait -- indeed, longer than Google did. It does have a big business, and it is dominant in the world of social media. Had the expectations not been so high, its current market cap would be impressive.

Trouble is: It's largely relying on display advertising and a torrent of users. And as business models go, that doesn't exactly follow the Google playbook. In addition to building a killer business model, Google exactly monetized its power and gave other small services away for free as ad-ons to make it all the more powerful. Facebook is doing the opposite: It is giving its power away for free, while it tacks on a revenue stream that's mostly just a function of its size.

Fortunately that size is gargantuan enough, that it's still a pretty decent business. But is it something you want to pay a huge premium to own? So far, Wall Street has said no.

The Facebook bulls aren't happy with where the company is now; they have faith there's more to come. Zuckerberg intimated this week that search was a new frontier, and there's hope of a payments solution, talk of an AdSense-like ad network to better leverage its reach. It's likely not in the offing, but many entrepreneurs and VCs have said to me, they'd happily pay a fee to be on Facebook's rich, unparalleled platform and even pay for Facebook Connect if they had to. The value they get is tremendous and can't be matched. (Just ask Zynga whose biggest challenge is an over reliance on Facebook.)

If all Facebook ever is is a display ad business (plus Zynga!) -- whether on desktop, mobile or both -- it's probably not worth $100 billion. Ever.

There's of course another reason people close to Facebook are still bullish: They know Zuckerberg. Facebook has only recently become a publicly traded stock. But in the court of public opinion its value has been a death-defying rollercoaster of cheers and jeers. Zuckerberg isn't one of those CEO who insulates himself from the criticism. He feels the swift kick in the pants -- acutely -- and iterates on the product he's been building alongside Facebook for the last eight years: Mark Zuckerberg, the CEO.

The public company fortunes of Amazon-- not Google-- might be the best role model Facebook could have right now. Wall Street didn't understand Bezos-- not when he was selling books, not when he launched AWS, not when he launched the Kindle. With his famous horking laugh, he didn't care. He never really had the public market accolades so he didn't have to learn how to live without them.