The Deal with Facebook

Posted on | January 4, 2011 | No Comments

Goldman Sachs’ recent $450 million investment in Facebook only intensifies the scrutiny into this social networking giant which recently surpassed Google as the most visited site on the Internet.

Goldman’s investment puts it first in line to win the lucrative deal for a future IPO of Facebook as well as manage the wealth realized by Time Magazine’s Person of the Year Mark Zuckerberg and other Facebook executives that could amount to over $16 billion.

Facebook, now valued at some US $50 billion gains some valuable time to develop without the scrutiny of investors demanding to know about its finances and strategy.

An interesting sideshow is the role of DST Global, a Russian firm that invested $50 million in the deal with Goldman and has been an important Internet investor in Russia and other parts of the world. Yuri Milner, DST Global’s CEO has expressed interest in social networking business models, particularly those that can mine emerging countries with millions of people making micro payments.

Facebook, which tallied over 500 million users by mid-2010 derives its value from the people that have joined it and also its network effects. In digital media, network effects increase the value of the network as more people join it. The fax machine for example, became increasingly valuable as more customers bought a similar device and connected it into the growing network. Facebook is designed to increase the interaction between its users and allow them to share information and links. Each Facebook user now averages over 130 “friends” and offers 90 pieces of content per month.

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Anthony J. Pennings, PhD has been on the NYU faculty since 2001 teaching digital media, information systems management, and global communications.

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