WE ARE witnessing a fascinating changing-of-the-guard moment in tech. The old internet, represented this week by once-mighty Yahoo, is fumbling with another leadership crisis it must solve before it can even think about restoring some semblance of relevance.
The new internet, Facebook, is ruled by a young man in a hoodie who is on the verge of creating a massive public company that, as was the nascent Yahoo back in the early 1990s, will be an internet darling longer on potential than track record, but running hard on an open field.
The common thread might seem to be the "If it's big, it's gotta be BIG" illusion that got us all in trouble at the turn of the millennium, when internet investment hysteria equated today's eyeballs with tomorrow's profits.
But it's always about the profits, and the people who promise them. This time that person is Mark Zuckerberg, who as the books on the Facebook IPO closed on Tuesday, well in advance of Friday's first trade, seems to have convinced Wall Street that his seven-year-old company could be worth more than $100bn — the richest-ever launch in Silicon Valley.
When you value your company at 100 times revenues, investors are banking on the belief that Zuckerberg has perfected the unstable compound that is social abandon and advertiser hunger.
Search remains pretty much the top use of the Web (as opposed to the internet) – the gateway to everything else. The other big use is now social, which was invented on the Web but whose chops will be tested in the app schoolyard that is the mobile internet.
But thus far, advertising works better on search than social. Google makes about $40bn a year, almost 100% on ads. Facebook is reporting last year's revenues at $3.7bn. Google has a market cap of roughly $200bn – so it’s twice as big as Facebook’s IPO valution and makes more than 10 times the money.
While Facebook is very successful, the question is: at what? It's great at creating a community of time-wasting freeloaders, but it needs to be good as an advertising medium to be worth anything to the institutions falling all over themselves to get in on the ground floor of its stock.
To compare the new and the old way of tech, let's just say, for the sake of argument, that there are two kinds of internet companies – Googles and Facebooks.
By interpreting choices, Google can serve up relatively relevant and non-intrusive ads. It's easy to ignore what Google is doing and just go about your business.
Facebook's model is decidedly different. It requires immersion. Facebook wants you to live in a glass house and to always be on display. With that pact comes scale, it has enlisted the support of countless other sites to enable and expedite sharing, first with Facebook Connect and now with passive updates to your social biography through frictionless sharing.
Facebook speaks of the goodness of always sharing with your friends, but it's really about sharing with people who aren't your friends, so that marketers can build profiles and buy targeted ads. They're not bashful about it – it's in their roadshow video.
In both search and social, revealing yourself is key. But Google and Facebook's approaches to exposure are very different. It's one thing to live on a stage, the footlights illuminating for a vast audience every move you make, and another to let someone read over your shoulder. Both are invasions of privacy, but they are in different leagues of intrusion.
Facebook wowed with its roadshow, but it has a tough sell that it can make an efficient market in ad sales in a way Google does.
Add to this that its members are migrating to mobile in droves and that advertising on smartphones also hardly has a proven track record (even when you control... everything), and you can begin to see some fundamental challenges. (From the Department of Worst Possible Timing, GM said it would stop advertising on Facebook, though it would continue to use product pages to market directly – and for free).
We tolerate ads – we don't love them. We might like some ads (and Don Draper), but ads are what we wade through to get what we want. Like the sermon at a soup kitchen, or the nag that precedes a night out with the boys, ads are the noise around the signal.
On television, ads get in the way, but they also give us an opportunity to step away (physically or metaphorically). The more intrusive the ad, the more we rebel. Even "perfectly" curated TV ads are a nuisance if not served up properly.
Smartphones and tablets have boundaries, much like TV, that are much different from the Web. It's a matter of real estate – since there is so little, any intrusion is magnified – and the burden of immersion (too much and we drift away).
There has never been anything like Facebook, and there is no serious competition on the horizon. Apart from people losing interest in the whole social networking thing, it is difficult to imagine a startup becoming a threat.
The barrier to entry is enormous. Given the scale of pre-IPO interest, many savvy professionals see Facebook as not only the only game in town but also a once-in-a-lifetime opportunity.
Investors are shrugging off the question of long-term viability: On Wednesday Facebook boosted its IPO by almost 25%, increasing the float to about 421 million shares. According to a Tuesday filing Facebook raised the target price range to $34-$38 per share, valuing the company at up to $104bn.
But Facebook, dependent on oversharing ennui, doesn't have Google's advantage. Google gets its advertising hints through the searches you do without much thought.
Facebook requires proactivity and a perpetual acceptance by Facebook members that their lives should be an open book. Google's relationship with you is passive. Facebook's is passive-aggressive.
Facebook's problem is in the little things – the updates, the likes, the ads. Investors are making as big a future bet as we've seen this side of the dot-com bust.
It seems as if it's built on little more than the kindness of strangers.