When a company files to go public it has to lay out in black and white the biggest risks that face the firm. What could kill it? What could undermine its business? Wipe out all its investors' money? Executives are required to reveal this by law.
It makes great reading, so I've been flipping through Facebook's IPO filing. And by far my favorite section is labeled "Risk Factors." Sure, there's some gobbledygook, but the part on mobile advertising is fascinating — if you pull it apart.
Roughly half of Facebook's users check in on mobile devices every month, but so far the company isn't making any money on mobile. Not a dime. It doesn't even sell mobile ads.
Turns out these ads are tough to get right.
"Mobile is a very small screen," says Julie Ask, a vice president at Forrester Research who specializes in mobile marketing. "It's not as if I'm on my PC and there can be advertising on the top or on the side and I can ignore it and still do what I want to do. On a small screen it's right in front of my face."
A bad mobile ad can muck up the entire experience. So Ask believes Facebook is smart to go slow.
"I'm glad Facebook isn't making any money selling advertising on their mobile application and their mobile services for Facebook," she says.
As a customer Ask might be happy — but as a business this is a problem Facebook will have to solve. The markets where it needs to grow — like India, Russia and Brazil — are dominated by mobile devices.
Last year smartphones outsold PCs for the first time ever. And advertisers see huge potential here.
"The phone knows a lot more about me than my PC does," Ask says.
She says you don't share you phone with anyone. It's in your pocket all the time. It knows which direction you are traveling, how fast you are moving and probably your altitude.
"I use my phone to bank. I use my phone for Facebook. I use my phone to shop, to change the DVR at home. I read books, I listen to music," she adds.
Your phone might know you better than your own mother. If Facebook doesn't figure out how to make money on mobile advertising someone else will. Advertisers are salivating. But, she says, "If you think about all the things Facebook knows about us, I think it can begin to seem a bit creepy." Especially if you consider what else Facebook could learn using our phones.
And that brings us to another big risk facing Facebook's business: privacy.
"Privacy is Facebook's Achilles' heel," says Jeff Chester, a privacy advocate at the Center for Digital Democracy. "Its entire business model is based on selling of user data to advertisers large and small."
And Facebook executives know this could spell trouble. As the company said in its IPO filing:
"Our business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection and other matters. Many of these laws and regulations are subject to change."
This week in Europe, Facebook executives were forced into having a meeting with a 24-year-old Austrian law student named Max Schrems. He is spearheading a public relations crusade against Facebook and has persuaded thousands of Facebook users to demand to see their data. "But they [Facebook] are only showing us a small portion of the data they collect," Schrems says.
He argues that when Facebook says it's deleting information about you it actually doesn't delete it — the company just hides the link. Schrems says Facebook refuses to share all the information it collects about users. Schrems' complaints have captured the attention of European regulators. In December, the company said an Irish government audit of its policies "demonstrates how Facebook adheres to European data protection principles."
Chester says "Facebook has to walk a very difficult digital tightrope."
He says that to continue to grow the company needs to keep making all of us comfortable sharing more and more information about ourselves and our friends. And it has to do this while finding new ways to sell that data to advertisers.
"What Facebook is going to have to do is make this seem less like Big Brother — less creepy and more like Big Mother," says Forrester's Julie Ask. "What I mean by Big Mother is somebody or something that is looking out for me that is helping me make good decisions."
Ask says creating products that sell billions of dollars in ads while at the same time inspiring that kind of trust will be an enormous challenge. Pulling it off will require a brilliant team of social engineers working like mad.
And this brings us to perhaps my favorite risk factor in Facebook's 186-page filing:
"We have a number of current employees whose equity ownership in our company gives them a substantial amount of personal wealth. Likewise, we have a number of current employees whose equity awards are fully vested and shortly after the completion of our initial public offering will be entitled to receive substantial amounts of our capital stock. As a result, it may be difficult for us to continue to retain and motivate these employees, and this wealth could affect their decisions about whether or not they continue to work for us."
After the IPO, Facebook's top executives are worried that many of their best and brightest employees will be too rich to want to work.
"These are young kids that we are talking about typically in their early 20s. Suddenly they have more money than they ever dreamed about," says Vivek Wadhwa, a fellow at Stanford's law school and an astute observer of Silicon Valley culture. "When you have so much money to spend, suddenly working day and night becomes less of a priority."