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Facebook’s IPO–Outsourcing the push to shrink privacy

Published on
6 Feb 2012
Written by
Yonatan Moskowitz

Facebook has been accused of shrinking the public’s “right to be let alone.” Soon they will be able to call on shareholders to demand that the government leave Facebook alone.

If you’re a privacy advocate, this is worrying.

Facebook’s IPO will increase the number of voices shouting on their side when regulators eventually threaten their pursuit of profit. Goldman may have a large stake right now, but if Goldman, Morgan Stanley, and shareholders-like-you own a piece of the pie, the desire to increase the size of the pie is spread more broadly.

Facebook is our case study, but their situation gives some general insights about the political economy of software businesses. These are the building blocks:

  1. Threat of trust busting in the future (and the company’s response)
  2. Software companies’ relatively low proportion of employees to customers
  3. Political economic theories of concentrated benefits and dispersed costs (more here)

First, trust busting. The Economist had a great review of the theater of Facebook’s IPO. They are not the only ones to mention the worry of trust-busting in the future, but they do offer a concrete prediction of what Facebook will do to forestall an intervention by regulators:

…as Facebook expands, it too could find itself being accused of abusing its dominance by smaller fry. For this and other reasons, one of the things Facebook is certain to do with the cash it raises will be to hire a much bigger army of lawyers and lobbyists.

Many companies have change course because of the threat of regulation (Facebook itself will now submit to regular audits–though these are privacy reviews, not competition reviews). Having a company in danger of being too successful at ruling the market is not a bad problem to have. But if the demands for lower switching costs (people wanting to move their data off of Facebook and onto a competitor’s site–something both privacy and competition advocates support) start to resonate with their large customer base, Facebook will find itself between the demands of customers and the interests of investors.

Will the army of lawyers seen in The Economist’s crystal ball be enough to quite or redirect these demands? To answer this question, we go down the political economy rabbit-hole and look at how this action spreads the costs of regulation.

As the LA Times reported, Facebook has expanded it’s employee base by 50% in the past year (!). This sounds impressive, but this was only an increase form 2,127 to 3,200. When comparing this to the number of Facebook accounts (estimated at over 800 million). That comes up to over 250,000 accounts per employee. Compare this to Apple’s 60,400 employees; Apple would need 15 trillion customers to approach that ratio.

This in itself is not a shock. For a long time people have been complaining that the software sector does not bring many new jobs no matter how productive it is (I hope to demonstrate the problems with this many variations of this complaint in a future post). Efficiency is the name of the game; this is business. But it is also problematic from a political economy standpoint.

The traditional political economy model claims that when small groups have large stakes, they exploit free-ridership issues on the other side to gain disproportional influence. But there exists a point beyond which concentration of interest is counterproductive (an interesting extension of Selectorate Theory).

Facebook employs few people compared to the size of their customer base. If their customer base gets angry, relatively few people will have their jobs on the line.  Regulators are not immune to political pressure, and in today’s environment, American companies will be worse off if they cannot claim that any additional regulation will put many thousands of “good American jobs”  on the chop block. If, however, Facebook could find a way to spread the benefit of leaving Facebook alone, they would have more bargaining power.

They can’t–and probably shouldn’t–just hire 50,000 employees to match Apple’s employee volume (a billion in profit will buy a lot of lawyers, but it won’t buy 50,000 of them). But now that the public will begin owning shares, Facebook will spread the downside of regulation.

Purchasing a share of Facebook is a loan in exchange for a stake in their future. If you buy a share, you are worse off if regulation threatens the future of the company. Facebook gives you a share of ownership, but in exchange it takes not only your money but also a good chance of having your political support when they need someone to call up Congress to beat back the FTC.

There are many reasons for an IPO (and many reasons for postponing one for this long). It would be wrong to say that this caused the IPO, but creating a larger base to push for the regulatory status quo is not a bad kicker if you’re Facebook.

Zuck and company are said to sell us as their product. If we as partial owners keep pushing to decrease privacy in exchange for profits, we can’t call foul anymore. We’ll be the ones selling ourselves.

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