The truth about...
Facebook: Hype 2.0
"Silicon Valley can now be considered to be at Delusional Level Red. Or green, given all the cash that is being shoved in Facebook's direction now."
Kara Swisher, All Things Digital
Microsoft has paid $240 million for a 1.6% stake in Facebook. Strictly speaking, that values the company's equity at $15 billion, and is $100 for every dollar of the $150 million revenue Facebook is predicted to make this year. It is a huge price to pay for potential.
For Facebook, the current doyen of the darling social network world, has a problem: it is a golden goose that has not laid any eggs. A valuation of $15 billion assumes that the market will follow Microsoft's lead and plough in another $14.76 billion dollars; it just might, but investors should be cautious about following the Wall Street herd.
Some arguments over the value of Facebook focus on the usefulness of the site as an online rolodex. That is like debating the merit of Elvis songs: the site is now so heavily-trafficked that its usefulness is almost an irrelevance. The real question is if Facebook can translate its current popularity into bigger profits: this year it is on course to generate $30 million in profit from that $150 million in revenue. That is a poor showing for a Web site expecting to pass 60 million active users by the end of the year.
Some analysts have drunk the kool-aid, and think Facebook may be the next Google or Microsoft. Such comparisons are specious, even risible. A company's market cap and earnings outlook are not the same thing, as investors found to their cost during the dotcom bubble. Google and Microsoft's income is not 'potential' -- it is actual.
| Internet Property Valuations |
|
Annual revenue ($ millions) |
Estimated Market Cap ($ billions) |
Source: Techcrunch |
Internet company | | |
| Google |
10,605 |
211 |
| Ebay |
5970 |
48.6 |
| Yahoo |
10711 |
36.8 |
| Facebook |
??? |
15 |
| IAC |
6278 |
7.9 |
| Salesforce |
497 |
6.2 |
| Monster |
1117 |
4.8 |
| | | |
Other | | |
| Microsoft |
51122 |
293.8 |
| Time Warner |
44224 |
68.8 |
| News Corp. |
28655 |
67.8 |
| Viacom |
11467 |
26.7 |
- In comparative terms to the search giant or software leviathan, Facebook is "a lemonade stand", as Swisher writes. Google brought in $3.9 billion in revenue in the second quarter alone, and provides a huge amount of free functionality and convenience to almost every internet user.
- Bill Gates' company has market share estimates as high as 90% or more for its software, markets computer hardware and home entertainment products, and has made four billionaires and an estimated 12,000 millionaires from its employees.
- At present, Facebook is no more than a huge message board with a jolly little media business on the side. It did not invent social networking or 3rd party plug-ins to social networking sites, and does not even operate in in the non-web market.
This year, Facebook will receive half of its exiguous revenue from a "sweetheart" guaranteed revenue deal with none other than Microsoft. So a more interesting figure than Facebook's chimerical $15 billion valuation is the $240 million that Microsoft has shelled out. It is more about exclusivity to advertise than just to get a piece of Facebook: Microsoft wants to develop the next generation of behavioural ad targeting and feels Facebook's data -- repositories of personal information gifted to it every time somebody signs up -- is just too much of a goldmine to let slip into Google's hands. Its 1.6% equity ownership is so small as to be become almost immaterial, Fortune's Brent Schlender points out. Remember that Google paid $900 million for exclusive advertising rights for MySpace a few years ago.
Social networking sites are also the flimsiest of all websites. Their appeal is ephemeral and dies out the minute a new fad comes along. It is the law of the internet, Schlender writes. When something is free and there is so much diversity, people migrate to new technologies and websites with much more frequency. Once a popular person leaves Facebook for social network pastures new, all his friends will follow.
Facebook will face new competitors every few weeks. Google has just announced OpenSocial, a development platform that will extend beyond the confines of the search giant's own stable of web sites and services "to include just about anyone who wanted to participate in Google's plans to take over the social Web", writes Blogumists. It points out that OpenSocial is a far more open development platform, in contrast to Facebook where all the applications are developed using Facebook's own development language and run on Facebook alone.
That $15 billion valuation suddenly looks even more preposterous.
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