How Much is Facebook Worth?
Social Networks are today's Web darlings, but some business analysis and common sense shows how flawed the current valuation of the brand really is.
Microsoft’s $240 million investment for 1.6% of Facebook gives the Social Network a valuation of $15billion. Is it worth it? Motley Fool’s Katrina Chan posed this question to three industry pundits. Their response illustrates how damaged Social Networking is as a business.
The argument against:
Using MySpace as an example, it’s clear that Social Networks are underperforming. The company reported earnings this week, and MySpace wasn't even a bleep on the earnings radar. The operating profits were some undisclosed fraction of the $23 million reported as "other" operations. Google in it’s analyst call last month verified this, shockingly admitting that it has been unable to find a monetization solution for social networks in general.
Add to this the growing cost of supporting the businesses, and the numbers for social networks are disheartening. Traffic is good, but it doesn’t come without a price. Mark Zuckerberg has already announced $200 million in data-center upgrades next year and a massive influx of new employees to support its recent growth. Clearly member acquisition costs are seriously trailing ad revenues.
Assuming Facebooks Is more like Google than Yahoo!, their current valuation is somewhere around $2 to $3 billion.
Rick Aristotle Munarriz points out that Facebook’s financials don’t add up. Google trades at roughly 10 times trailing revenue. Slower Internet content players like Yahoo! trade at about half that multiple. Assuming Facebooks Is more like Google than Yahoo!, their current valuation is somewhere around $2 to $3 billion. And that’s not including the likelihood that Social Networking has peaked as an Internet fad. It’s very likely that the current valuation will be Facebook’s all-time high.
The argument in favor:
The argument for a high Facebook valuation is based on future earning potential – not as a Social Network, but as an online portal.
The potential here is that in addition to advertising revenues, Facebook has the potential to monetize traffic to 3rd party websites that build successful businesses on Facebook’s platform. In this case, Facebook would morph into a pay-for-placement web aggregator, providing an interface, platform and audience for e-businesses. That seems like a stretch, to me.
Those of us that lived through the first dot-com bubble learned a hard lesson that future earning potential is not a viable way to value Web businesses. Audiences are fickle, and new innovations can send today’s guaranteed successes to the trash heap. Will 3rd party businesses be able to make money on Facebook? Maybe. Will they be willing to pay for the opportunity? Perhaps. Will users continue to flock to Facebook if it sells out to a commercialized collection of money-making schemes? Doubtful.
Social Networking is an interesting media phenomenon. But we are already seeing cracks in the business model for these sites. What does it say that the Motley Fool’s lone argument in favor of Facebook’s current valuation is that it may be able to transform itself into something other than a Social Network? If nothing else, it should raise red flags for all those who think Social Networks will be tomorrow’s web leaders.
Bill Houghton
in Business Analysis, Facebook, Internet, Social Networks, Web 2.0
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Reader Comments (2)
The problem with monetization of social networks is that-
1. People want something for nothing
2. People think they are "owed"a free experience if it is called "social media"
3. People want to be in charge of their online experience without having to deal with ads or having their personal information tracked.
4. Lack of imagination
I've seen only a few business models that allow you to have free access to a point, then charge you for adding other services. LinkedIn does this. Why not have additional services at a price?
This is a social community. Why not have a mechanism in which poeple can donate to the community? People pay property tax, right? Why not supply a page on the site that talks about the upgrades, the jobs being created, etc. and then have a place where people can donate. If everyone on MySpace donated a dollar each year, MySpace would be doing quite well.
People keep looking to add business fluff to the community so they can charge advertisers more, but they don't think in actual "community" terms and turn to the community users.
Food for thought from my armchair to yours.
I don't see Microsoft's investment in facebook as indicating that Microsoft actually sees the value of that company at $15 billion. I think instead Microsoft is looking at the facebook interface and thinking that owning a piece of that technology may allow Microsoft in the future to incorporate many of the ideas from facebook into its future products. Microsoft took the internet and integrated it into their OS so that now users experience their entire computer as well as their data as a "linked in" experience. Application developers are moving quickly to deploy WEB only applications as broadband access spreads in the US. I think Microsoft sees in social networking and the application framework deployed by facebook a new technological/interface paradigm that they hope to incorporate into their future applications and Windows OS.
From that perspective facebook is quite valuable. Imagine a Microsoft Windows OS built as a social-networking portal where applications are pushed to the users page similarly to how facebook applications are deployed. And imagine that Microsoft controlled not only the OS but also the distribution system by which new applications could be deployed to a users page (i.e. desktop). Microsoft could eventually charge a fee for developers to deploy their applications thus profiting not only through their own application sales but also on every competitors sale.
It is clear that application deployment via the internet is coming and will replace entirely DVD and CD based application installations. The switch to online application deployment will save companies like Microsoft hundreds of millions of dollars a year. The winner in this battle will be the company that controls the portal through which these applications may be deployed to the various clients. This is what Microsoft is eyeing in is "gift" to facebook.