Greed and Tech – a familiar refrain

The recent controversies surrounding the Facebook IPO show no signs of abating. Was there insider trading? Did NASDAQ folks down?  Did Morgan Stanley overvalue the company? Is it a reflection of a lack of confidence in Mark Zuckerberg? As it has been unfolding it sent me to the bookshelves to read about another technology company who never lived up to its hype, was the creation of two young Swedes, Ernst Malmsten and Kajsa Leander, who had some success with a Swedish internet book site in the early 1990s.  They sold that site, pocketing a good payout, and then built an online fashion site with the help of a slew of investors eager to cash in on the e-tailing boom. Spending $135 million in 18 months, was created on the assumption of massive sales of fashion online. Sales were solid and improving, but not fast enough. When credit tightened in the late 1990s, went belly up in spectacular fashion. Malmsten wrote about the entire journey in Boo Hoo. It was a business failure of epic proportions.

Aggressively confident and self-confident, Malmsten’s account is a fascinating read when it comes to how money was made via finance, through borrowing and the hope of selling. The year-and-a-half recounted is a blur of parties, problems, pitches and solutions. They founders and those about them worked very hard, but towards what end?

The idea for the site itself – selling a particular kind of clothing – was neither innovative nor well considered. Barriers to entry were not about the site; they were about delivery of clothing and support. Malmsen does not spend much time on the technical aspect of the business; he lacked the knowledge or skills. Above all, the book and its author are surprisingly thin when it comes to a more old-fashioned way of making money: income exceeding expenses.

We are in the midst of a craze for social media – we read and hear about social media’s power and importance. As the largest social media site, Facebook is at the apex of this trend. But even with its millions of subscribers and the models of valuation, its underlying business model – how it makes money – is advertising. And unfortunately for Facebook, its advertising is a distraction from what it provides. Google, who at bottom is also another advertising company, integrates its advertisement into what it offers. Its power is that it provides a solution that is part of its service.

I have yet to meet someone who will admit to having clicked on a Facebook advertisement.  The “crisis” around Facebook isn’t new; it is another example of greed and the power of finance to obscure basic business functions.