A market valuation of 100 billion dollars for a business started less than ten years ago is an impressive achievement and that sum now presents massive challenges for management who have to deliver on what investors believe the service is capable of.

At US$38 a share, Facebook is valued at 76 times its projected 2012 earnings of 50 cents a share, and nearly twenty times its expected revenues of US$5 billion. This compares to Google which trades at less than 15 times its 2012 profit estimate and six times revenue.

For Facebook to match Google’s value, the social media service is going to have to start making serious money beyond they can from charging egoists and corporations $2 a time for featured posts.

Google’s success was in moving out of their walled garden, had Google focused on advertising just on their own search pages the company would be earning a fraction of the billions they now make every quarter.

It’s difficult to see how Facebook can move off their platform into other sites and with users moving to mobile, the company will find itself even more constrained by Google and Apple who want to control access to their devices.

A more obvious course for Facebook is to maximise income from the massive data base of likes, preferences, relationships and opinions they have amassed from their users. How they do this will probably be the biggest challenge to Facebook’s management.

In monetizing their database, Facebook will push the limits of the law, tolerance of privacy advocates and possibly the patience of their user base. This is going to test a company that has in the past been slow to respond to public concerns.

Another challenge is perception – with such a massive valuation, Facebook is going to attract critics regardless of what they do.

A good example of this is the number of people criticising the float for not ‘popping’ on the stock market debut. At the end of the first day’s trading the stock had only gone up 0.6% and some in the media claimed this showed the IPO wasn’t the successful.

The idea a successful IPO is one that soars on the first day of trading is a naive view from a 1980s mindset. The idea was born out of the privatisation of British and Australian utilities in the 1980s and 90s where taxpayers were seduced by the idea of “free money” in exchange for selling community assets cheaply.

A ‘stag profit’ from a share that soars on its public float is theft from the existing shareholders and a transfer of wealth to insiders and their advisors.

Silicon Valley venture capitalists and startup founders aren’t dumb and have never fallen for that trick – investors pay dearly for stock in their ventures.

While no-one would call Mark Zuckerberg and his management team dumb they have a big job ahead of them finding revenue sources to justify the $100 billion market valuation. It’s going to be an interesting ride.

The sign on his shop window apologizes and the shop itself is up for lease. Shortly there won’t be any evidence a long standing local business was once there.

Roy had no exit from his business and he sell the operation as a going concern.

For Roy his retirement will be funded solely out of his savings. If he’s lucky he’ll have saved enough of his income from the business for a comfortable retirement – unfortunately many small business owners they’ll eke out the rest of their lives on the pension.

Even for those who have planned for an exit, many of their plans have fallen over in the aftermath of the 2008 financial crisis.

It’s always been questionable whether Gen X and Y entrepreneurs could afford to pay the sums for the affluent retirement of Baby Boomer business owners but now the post 2008 contraction in lending means it’s even less likely retiring business owners like Roy will find someone to buy their businesses.

While the focus is on twenty something app developers selling their businesses for a billion dollars, the truth is that wealth for most business owners lies in the local newsagent, hairdresser or coffee shop owner being able to sell their operation for a reasonable return.

For many baby boomer business owners it’s going to mean working more years than they intended and sharply reduced retirement expectations.

Property values too are difficult. Many boomer businesses had the sensible model of buying the property their business occupies as a retirement nest egg.

Again those properties are too expensive for the new generation and the deleveraging economy means the outlook for property values isn’t good.

On every level, things are going to be tough for those wanting to sell businesses over the next decade.

Those who do get good prices for their businesses are going to be those doing something exceptional to gain attention with income and profits that make them stand out from the cloud.

Just being the best hairdresser in the neighbourhood or having a popular cafe isn’t going to be enough.

Hopefully Roy The Barber managed to stash away enough for a well deserved comfortable retirement.

“It seems we forgot to count the number of beds!” whines the cleaning contractor when challenged about a filthy hospital.

“We had no idea these people were corrupt,” growls the politician and former trade union official when confronted with proof its factional friends were misusing expenses.

An interesting phenomenon in the rise of the managerial classes over the last thirty years has been the group’s refusal to take responsibility for their failures.

Instead we see boards, investors, managers and politicians duck responsibilities that a reasonable observer would have thought is the reason for their healthy salaries, bonuses and perks.

One of the many conceits of 1980s thinking is the ideology of “personal responsibility” – to low paid workers and those at the bottom of society this mantra is applied ruthlessly.

The call centre worker who makes a mistake gets counselled or fired while the aboriginal kid who steals a can of coke is denied bail and goes to jail.

Let’s not mention the fines and sanctions that befall a small business owner who is too slow in submitting paperwork or forgets to pay one of the countless fees that make up today’s hidden taxation.

In boardrooms and Parliaments those doing the wrong thing rarely face any accountability; politicians caught misclaiming expenses are allowed to pay it back at their convenience while senior executives and captains of industry with a track record of mistakes continue to be employed in positions way beyond their abilities.

One exception to the that rule is former Tyco Chief Executive Dennis Kozlowski and his cohorts who looted their company through the 1990s. Eventually their excesses became so great that the CEO and his cronies ended up being jailed.

Not that this has rattled some of his cronies sense of entitlement. Former CFO Mark Swartz is suing the company for $60 million in retirement benefits and other monies.

I have a personal connection with Messrs Swartz and Kozlowski – I worked for their company in the mid 1990s and lasted nine months in a culture of cronyism and rorts where middle management enthusiastically aped the excesses of their senior executives.

One can argue I didn’t carry out my due diligence – a little bit of digging and more detailed asking around would have revealed Tyco’s institutionalised corruption and cronyism at the time.

I paid for this oversight by having my contract terminated in a public and humiliating way which drove me to set up my own business.

While working for companies like Tyco I saw them drive smaller businesses into the ground through slow, or non payment, of invoices. Strangely they always seemed to pay the corporate hospitality bills on time.

The weakness in today’s corporatist economy is that boards like that at Yahoo!, executives like Tyco’s in the 1990s and many of our business and political leaders have a sense of entitlement way beyond the value they add to their business, community or society.

Worse, the main lesson of 2008′s financial crisis is that massive government spending will protect these peoples’ bonuses and privileges regardless of their actions.

As investors, employees, suppliers and voters we have to do our due diligence on these people and organisations. We have the tools today to check the track record of those who want our vote, skills or products.

In today’s economy, we can’t afford to squander money or time on those who demand fat fees and salaries without delivering value.

At the cash register and ballot box, it’s time to do our due diligence.

The term is necessary though as many online business models are based upon giving away a service or information for free. For those businesses to survive, they have to find a way to “monetize” their user base.

When Google were floated in 2003, the question was how could a free search engine “monetize” their users. The answer was in advertising and Google today are the world’s biggest advertising platform.

Facebook’s Inital Public Offering (IPO) announcement raises the same question; how does a company valued 99 times earnings find a way to justify the faith of its investors?

Advertising is the obvious answer but that seems to flattening out as the company’s revenue growth is slowing in that space. The AdWords solution tends to favour Google more than publishers as most advertising supported websites have found.

Partnering with application developers like the game publisher Zynga is another solution. Again though this appears to be limited in revenue and Zynga itself seems to be having trouble growing its Facebook user numbers.

So the question for Facebook is “where will the profits come from?”

There’s no doubt the data store Facebook has accumulated is valuable but how the social media service can “monetize” this asset without upsetting their users is open to question.

For Facebook the stakes are high as the comparisons with Friendster and MySpace are already being drawn.

We’ll see more partnerships like the Facebook Anti-virus marketplace, but these seem to be marginal at best.

In the next few months things will get interesting as Facebook’s managers and investors strive to find ways to make a buck out of a billion users who don’t pay for the service.

While “monetization” is an ugly word, it is one that every online company thinks about.

Every web based businesses will be watching how Facebook manage their monetization strategy closely as the entire industry struggles with the faulty economics of providing services for free.

As we all know, there is no such thing as a free lunch. When another business gives you something for free it’s safe to say there is a cost somewhere.

One of the speakers at the City of Sydney’s Let’s Talk Business social media event stated this when talking about social media saying “I can’t believe all businesses aren’t on Facebook – it’s free.”

Social media isn’t free. We all know the value services like Facebook are mining are the tastes, habits and opinions of their users.

For businesses, engaging heavily in Facebook or any other social media service hands over far more information about their customers to a third party than they themselves would be able to collect.

All of that information handed over to a service like Google or Facebook can come back to bite the business, particularly if a well cashed up competitor decides to advertise at the demographic the business caters to.

The core fallacy though is that these service are “free”. They aren’t.

Every single service comes with a time cost. Every social media expert advises the same thing, businesses have to post to their preferred service of choice at least three times a week and those posts should be strategically thought out.

That advice is right, but it costs time.

For a business owner, freelancer or entrepreneur time is their scarcest asset. You can always rebuild your bank account but you can never recover time.

Big businesses face the same problem, but they overcome this with money by hiring people for their time. In smaller businesses, this time comes out of the proprietor’s twenty-four crowded hours each day.

The computer and internet industries are good at giving away stuff for free, in doing so they burn investors’ money and the time of their users. The social media business model hopes to pay a return to investors by trading the data users contribute in their time.

While businesses can benefit from using social media services, they have to be careful they aren’t wasting too much of their valuable time while giving away their customers to a third party.

Often when somebody looks back on their life they say “I wish I had more time.” They’ve learned too late that asset has been wasted.

Wasting that unreplaceable asset on building someone else’s database would be a tragedy.

One side claims a billion dollars for a business with barely any revenue and 13 employees is clear evidence of a bubble while the other side say its a strategic purchase that is only 1% of Facebook’s estimated $100 billion market value.

The latter argument is deeply flawed, comparing the purchase price against the value of other assets is always risky – particularly in a market where those underlying assets are being valued at the same inflated rates.

We could think of it in terms of a Dutch farmer in early 1637 claiming that paying a thousand Florins for a tulip is fine when he has a warehouse containing hundreds of them.

In reality, that farmer during the Dutch Tulip mania of the 17th Century held contracts for delivery; just as modern day investors held Collateral Debt Obligations.

Measuring value against other inflated assets is always dangerous and only fuels a bubble.

A much more concerning way of judging the wisdom of Facebook’s investment is against profit and revenue.

If we compare the purchase of Instagram against Facebook’s revenue, then the investment has cost them three months income.

Should we compare the acquisition against profit, Instagram has cost Facebook five years of profit at current rates.

Both of those numbers are very high and it indicates how big a gamble the Instagram acquisition is for Facebook.

It can be argued there is a lot of blue sky ahead for Facebook and that future profits and revenues will justify the Instagram purchase.

There’s also a very compelling argument that Facebook has to get into mobile services and Instagram does that.

Whether Instagram is worth three months income or five years profit to Facebook remains to be seen, but we should have no doubt it indicates we are well into Tech Boom 2.0.

“Give us GST relief” plea the big retailers.

“China will boom forever” assert the government economists.

“Big corporations will buy us out for a billion dollars” pray the hot new start ups.

“I’ll win the lottery this week” thinks the overworked cleaner.

We’re all waiting for the big saviour that’s going to rescue us, our business or the economy.

It could be a big win, a big client or a big government spending program to rescue us.

Sadly, should we lucky enough for that saviour to arrive, it may not turn out to be all we expected.

There’s many lottery winners who curse their win while many disaffected founders who watch their startup baby fade away neglectful new owners.

For a lumbering department store, tax changes will do little to save them from market changes their managements are incapable of comprehending.

Interest rate cuts are great for business when customers are prepared to take on more debt but in a period where consumers are deleveraging a rates cut will do little to stimulate demand.

The clamour for interest rate cuts are a classic case of 1980s thinking; what worked in 1982, 1992 or 2002 isn’t going to work the same way in 2012.

What’s more, the Zero Interest Rate Policies – ZIRP – of the United States and Japan are a vain attempt to recapitalise zombie banks saddled with overvalued assets rather than an effort to help the wider economy.

China is more complex and there’s no doubt the country and its people are becoming wealthier and there are great opportunities.

The worry is most of what we read today could have been the wishful thinking written about Japan thirty years ago. Lazily selling commodities to the Chinese while they create the real value is not a path to long term prosperity.

In business we have a choice, we can pray for luck or we can make our own luck.

Some choose to join the cargo cult and pray, or demand, that someone else does something. Others get out and do it.

John Frum gravesite image by Tim Ross through Wikimedia Commons

This year, the preparations for the Locations Show conference are overshadowed by the US government’s struggling with continued subsidies to the Export Import Bank, an organisation going by the wonderfully Soviet name of the ExIm Bank.

While ExIm and screen subisidies aren’t directly linked in the US – the bank being a Federally funded body that finances American manufacturing sales to foreign market while state governments compete for productions – both though illustrate the zero sum game of corporate welfare that leaves citizens poorer in the process.

Delta Airline’s law suit over Exim subsidies to Boeing gives us a real life illustration of how business loses in these battles for government largess.

When Delta Airlines goes to buy or lease a Boeing 777, they have to find funds at a commercial rate of interest. Air India on the other hand gets a subsidised rate courtesy of ExIm bank.

However if Delta chooses to buy an Airbus A330, European governments will offer similar subsidies to the American carrier.

So the subsidy system actually encourages American carriers to buys European jets rather than the US products. Nice work.

This distortion is something we see too in film subsidies, as government funds are siphoned off to support large corporate movie productions.

Nowhere is this truer than in Louisiana where the state embarked in 2009 to capture the so-called “runaway production” market of footloose movie projects that shop around the world for the most lucrative subsidies.

This has worked, with Louisiana based movie production expected to total 1.4 billion dollars in 2011 on the back of $180 million in subsidies.

One of the productions Louisiana grabbed in 2010 was The Green Lantern which came as a surprise to the government of the Australian state of New South Wales who thought Sydney had secured the project.

The Green Lantern loss was the nadir for the Australian film industry that ten years earlier had been overwhelmed with productions like The Matrix Trilogy.

At the time of the Green Lantern loss the industry appeared to be in its death throes, crippled by a high Australian dollar and disadvantaged by relatively lower government subsidies.

You’d have thought that riches to rags story had taught Australian politicians that dumb subsidies don’t work and may have actually damaged the local film industry more than it helped.

Unfortunately not.

Last week the Australian Federal government announced $13 million in support for production of Wolverine. The Prime Minister’s office gushed;

To attract The Wolverine to Australia, the Gillard Government granted the producers a one-off payment of $12.8 million which will result in over $80 million of investment in Australia and create more than 2000 jobs.

The payment effectively provided The Wolverine a one-off investment package equivalent to an increase in the existing Location Offset to 30 per cent.

Without this effective tax offset incentive, the producers of The Wolverine would not have chosen Australia as the location.

In the 1950s, it made sense to invest in the industries of the future such as aviation, movie and car manufacturing industries.

Unfortunately for our politicians in Washington, Canberra, Sydney and Baton Rouge, we don’t live in the 1950s.

The advice was terrible and what was valid could have come from a 2008 book on business social media marketing.

But the room loved it and obviously the client – a major bank – thinks the speaker’s work is worthwhile. He has a market while many of us who’ve been covering this field for a decade don’t.

Timing is everything in business. Earlier this week stories went around the Internet about how Microsoft could have invented the first smart phone.

Microsoft could well have done it, they tried hard enough with Windows CE devices through the late 1990s and there was also the Apple Newton and the Palm Pilot.

While all these companies could have developed the smartphone in the 1990s it wouldn’t have mattered as neither the infrastructure or the market were ready for it.

Had Microsoft released the smartphone in the mid 199os it would have been useless on the analogue and first generation GSM cellphone networks of the time.

Customers were barely using the web on their personal computers, let alone on their mobile phones, so the smartphone would have been useless and unwanted.

Ten years later things had changed with 3G networks and real consumer demand so Apple seized the gap in the marketplace left by Motorola, Nokia and the other phone manufacturers with the iPhone and now own the market.

Apple weren’t the first to market with a smartphone, just as Microsoft weren’t the first with a Windows-style operating system and Facebook weren’t the first social media platform.

Those who were first to the market stood by while upstarts stole the market they built.

Plenty of people have gone broke when their perfectly correct investment strategies have been mistimed – “the market can stay irrational longer than you can stay solvent” is often proved true.

That’s the same with the speaker this morning; he’s not the first to discover social media’s business benefits but his timing is impeccable.

Being first is no guarantee of success if your timing is wrong.

It’s worthwhile reflecting on the hubris of those who believed their technology made a ship unsinkable, or those who believed their shipyards would never close and – probably most relevant today – those who believe the sun never sets on their empire.

Technology can liberate our lives which is shown by the fact the average American, European or Australian lives far longer and better than even kings did two centuries ago. But we should never assume these improvements don’t come at a real cost to ourselves, the environment or the ways of life we take for granted today.