Facebook, Face China

After yet another private equity fund bought into Facebook, before it goes public , its founder Mark Zuckerberg became $18 billion-rich. Richer than Google founders Sergey Brin and Larry Page. Many investors, waiting for FB’s listing, will let out a collective gasp in anticipation of immense riches to come. They should just resume breathing normally. Hyperventilation before the IPO might run into a wall of hype. Yes, a lot of people use FB, but the last technology bubble taught us that eyeballs matter, but profits matter much more. And more often than not, it’s hard to convert one into the other. Myspace, which was bought by media magnate Rupert Murdoch for over $580 million in 2005, was sold recently for $35 million, at a loss of 94%. Social networking optimists argue that FB and similar products like the recently-listed LinkedIn, are different. Maybe, but to justify valuations as high as FB’s staggering $70 billion, social networking sites might need to diversify into making jet engines or producing oil to generate earnings.

For many things, China has been a weathervane and prospective investors in social networking should look east for early warnings. Chinese data suggest that the number of social network users is plateauing out. First, the average Chinese youngster is spending 13% less time on social networks, compared to six months ago. Second, data from Alexa which monitors traffic for Chinese sites Renren, Kaixin001 and Douban shows that in the six months from July to January this year, average daily traffic for the first two were flat, only the last grew marginally. Naturally, investors who piled into Renren when it listed in America at $24 a share, have pummeled the stock down to $7. It might be better to lose face, and FB, rather than lose your shirt.