05 June 2012

the nature of transactions and facebook

Does the world need yet anther diatribe regarding the Facebook IPO debacle? Probably not, but here I go anyway. Facebook's IPO failed because of greed and a fundamental misunderstanding about transactions.

My transactional understandings are rooted in a simple concept in sales in called "win win". A transaction should be equitable to all involved. And, in any successful transaction all parties need to come away with something of worth. Inherent in any transaction is what we call a 'deal', or the worth of engaging in the transaction. For the moment we'll refer to this worth as 'profit'. I'm likely stretching your understanding of 'profit', but bare with me. 

Profit is that range between the most you might give up under any circumstances, and the least possible. HIgh service, reputation, warranty, etc… these are all part of the inherent 'profit'. If Seller A the only one offering a 'thing' for sale, they might be tempted to charge the highest price known for that 'thing'. This would be Seller A not sharing profit. You, the purchaser, are not likely to favor this arrangement and will be less than willing to come back and repeat it, unless you have no other choice. For the retailer, discounts and coupons, are first a way to garner your attention, but secondarily (and very importantly) they are a way to show you that they are willing to share the profit with you. Their first goal is to get the sale. The second goal is that you remember them favorably towards the next transaction. Pretty simple right?

As an interesting point of reference, a transaction in which part A holds all of the cards, and extracts ALL of the profit would most likely be a singular transaction with little or no chance of a voluntary follow up transaction. A mugging would be a good example of this type of transaction.

Back to Facebook. The investment bankers, lawyers, and executives in charge of the Facebook IPO failed to make an accurate assessment of worth, and/or, got greedy. Offering stock at the apex of success does not offer investors the opportunity share in much, if any, of the profit. Short term gain is why many people invest in IPO's. For Facebook shareholders, there is none. The only difference between Facebook and digg.com right now is public access towards ownership of a dwindling asset.