Falling on its face?

Businesses like Facebook may pose a danger to their investors. James Ball writes.

Excitement about the value of data-gathering fed Facebook's amazing valuation - but it looks unlikely to be such a goldmine We're told we're living in the information economy. Data is currency: businesses which collect it and use it well - to target sales, adverts and more - will thrive, while those who don't will get left by the wayside.

It's a philosophy that has become so uncontroversial it's stated as the obvious, and is the business model of the new internet giants: both Google and Facebook alike rely on advertising for the overwhelming majority of their revenue.

Google and Facebook have more data on us than virtually any other organisation - including governments -on the planet. The belief in the untapped potential of the profit contained therein was what justified Facebook's amazing valuation: a $38 share price, adding up to more than 80 times the company's annual earnings (Google trades at about 20 times earnings).

We know what's happened since: within three days of their flotation, Facebook's shares lost about 20% of their value. The fallout is just beginning -shareholders are filing lawsuits, questions are being asked about mobile platforms, and others are pointing to the hubris of the company's executives.

These may all be decent explanations -but perhaps it's worth taking a step back. What if all of this data, all of this information, actually isn't worth that much?

Our personal information is valuable to companies because they believe it'll help them sell us stuff more effectively.

For Google and Facebook, though, it's not clear that's working out. But the evidence suggests Facebook adverts, which can be targeted at amazingly specific groups of people in tiny areas, don't work nearly so well: one piece of research suggested.

Once you start picking holes in the data-as-profit school of thought, the garment keeps fraying: the users are getting ever more concerned about privacy, and how their data is used. Big shifts from any major company in privacy policies already attract a backlash.

Everyone is collecting the data they need to understand their audience, and to deliver better services and products, so there is a further question for companies - unlike Facebook - whose business model relies on selling data to others.

The information revolution doubtlessly benefits business and consumers in a huge number of ways, and is reshaping numerous industries - including, of course, publishing.

Those betting the farm(ville) on Facebook, or any investment reliant on data in the future generating far more cash than it does today, could easily find themselves losing their shirts.