Facebook: $6 Billion? Nah.

Look. If you're Facebook, why on earth would you sell to Microsoft for $6 billion if you didn't sell to Yahoo for $1 Billion last year? You just wouldn't. You don't NEED anyone right now. Do you? Mark and his senior team has probably already been "de-risked" by the…

200Px-Zuckerberg CroppedLook. If you’re Facebook, why on earth would you sell to Microsoft for $6 billion if you didn’t sell to Yahoo for $1 Billion last year? You just wouldn’t. You don’t NEED anyone right now. Do you? Mark and his senior team has probably already been “de-risked” by the last round of investment, meaning they’ve taken money off the table and are not lured by possible riches (this is pure speculation, mind you, not personal knowledge). It must drive everyone who is trying to buy them crazy.

Facebook has a tiger by the tail. Today I turned down a chance to discuss “if Facebook is the next Google” on CNBC. It’s the current fascination. Why Facebook, why now, when there are dozens of other social networks out there? I’ve heard valuations for the company that put it at past $12 billion. On $30 million in estimated earnings this year.

Wow. Get me that multiple, please! Even $6 billion is what – 200 times earnings?

It got me thinking. After all, in 2002, tons of folks were asking the same question. Why Google, why now, when there were dozens of other search engines out there?

Last time, there was an easy answer: PageRank.

Is there an easy answer this time?

I don’t see one. Do you?

52 thoughts on “Facebook: $6 Billion? Nah.”

  1. There may be a simple answer, John. Facebook has virally marketed itself and may simply be the peoples’ choice. This type of randomness pits itself against the best marketing brains. So the winner is Facebook, as the winner was Google years ago.

  2. The Facebook blog suggests that there is a lot of technological depth in the news feeds. These offer every user a personalized rolling update of the activity of their friends, based on what Facebook has learned about the user’s interests. This is analogous to PageRank, where relevance, timeliness and large scale data mining require some serious PhD-worthy CS.

    Apart from that, I wouldn’t underestimate the value of Facebook’s general superb execution. The interface is clean and easy to use, the site loads quickly, and they’ve got the social interface right. Many similar things were significant contributions to Google’s success.

  3. The value isn’t in the users, but in the network effect all the connections between the users. Nowhere else has anything remotely close to knowing, explicitly, who your friends are and what they’re interested in.

    Mix that with the huge lockin that facebook has by its nature it is worth a larger multiplier. If you wanted to leave facebook, you can and take your contacts’ information with you, but if they’re still using facebook, you either lose their updates and interest connections, or you keep using facebook.

  4. it’s actually even simpler than that. Google had revenue, and a really strong case why there would be very much more revenue in the future. Where there is lots of revenue, there comes profit, most of the time.

    For facebook there is an amazing platform and I have to admit it is probably the only real social network out there. But the news feed on the start page is again just a feature. It does not result in revenue either, neither does PageRank really.

    Google didn’t get such a big value simply because it was big, but because each added bigness resulted in added revenue and marginal cost was low. That is just not the case for Facebook.

  5. Interesting take. My concern is that FaceBook may fall flat on it’s face. In the same way that the fickle public has flocked to their door, they may similarly head down a different route next week or next month when the “next big thing” comes along.

    The trick they need to pull is to keep their audience captive and keep ahead of their competition (i.e. everyone out there who thinks all this is easy)

  6. I agree with Mr. Greenspan’s assessment and would add – don’t underestimate the power of the ‘platform’. The clean execution combined with a growing catalog of apps tied to the platform make it a compelling competitor. The robustness of their platform approach has been lauded by many developers.

  7. There are a couple things special about facebook..

    Remember when AOL was hot? you would log into one place and get email and IMs and meet your friends in a chat room…

    what’s the problem? AOL played it very wrong AND IM and chat rooms were synchronous, and email got full of spam.

    Facebook makes your experience of the internet more socially dynamic (and unlike the blogosphere it’s centralized and easy for the masses to digest) it fills it with people. You log in. You have messages, and all manner of interactions with all manner of people. You’re bored? You don’t have to leave facebook, the open development platform ensures you can find all manner of diversions without going anywhere at all.

    [Facebook spam is minimal (does it exist at all?) because it’s opt-in .. which means you can now go back to asynchronously messaging your friends with no fear of spam. Yes you can do that with gmail, but that’s ALL you can do with gmail.]

    Facebook is where AOL could have gone. Facebook is non-stop social interaction along multiple axis—it’s the answer to all those people who find the internet cold and empty.

    It’s also the AntiWeb 2.0 … because it’s centralized.

    There are some implementation problems in facebook.. but they’re not major:
    1. what happens in groups doesn’t get integrated in your news feed very well.
    2. The Wall is a weird concept that Wall-to-Wall makes a little easier but still, I don’t know how long it will last–only the News Feed keeps Walls really going.

    News Feeds drive the users to all the other features… even more so than PageRank drove people to pages via google. (that’s the appropriate comparison)

    How is it not all monetizable? There’s nothing locking users into Google… there’s something locking users into Facebook. Lots of users who are keeping track of whatever their friends are doing. Talk about an oppurtunity for viral marketing.. you could pay some key popular people to add new apps to their profile and thousands of others will add the apps, these apps can drive all kinds of mash-ups with unlimited monetization potential just as the web is unlimited in its potential for monetization.

    It’s not a website. Facebook is it’s own network.

  8. sorry for the double post, this is short I promise:

    With google pageRank meant pages were important to a lot of people–which means maybe they’re important to you too.

    With facebook, everything that happens in your newsfeed is relevant to you.

  9. The difference (and value) that comes from facebook is the user data. People are used to lying about themselves online, but Facebook has created a platform where people are obliged to tell the truth about themselves to make the app useful to them. So they expose their life, buying habits, and everything there is to know about them. And that as we know it, is money in the bank for facebook partners, ad sponsors and whoever ends up buying them.

  10. I predict these sites will be sold to a mojor media company


    Facebook has all kinds of users and a huge brand that wont stop growing. Congoo has a growing audience, patented technology, awards from major media and partnerships with major publishers. Picsearch is a must have for all these startups and has cornered the powered by image search partnership model. Squidoo is in bed with webmasters and they seem to all use the alexa toolbar…so thats a great audience. Rollyo was featured with Congoo and picsearch on PC World Cover for June.

  11. John you have totally missed the point and not begun to answer the question. Whether or not Mark & co are willing to sell, the question is what is Facebook worth? You have chosen an arbitrary number ($30m in earnings) and made the claim that makes the company expensive. Growth stocks tend not to be valued on earnings. eBay bought Skype for c.$4bn. I am not even sure whether Skype even had any revenues at that point, let alone any earnings!! (OK they had some sales but not much.) The value of Facebook is the speed of growth in the sustainable sub base and the ability to persuade those subs to spend some money or click-through and persuade advertisers to use it to advertise.
    Frankly for such a young company to have $30m in earnings already makes it a fairly astonishing achievement in my view.

  12. eBay buying Skype is a bad comparison because it isn’t clear that was a good deal. After all Yahoo! bought broadcast.com for $6 billion and Microsoft bought LinkExchange for $250 million both of which turned out not so great.

    The main problem with Facebook demanding such a premium is that by the time Google decided to go public they’d figured out how to make money [in fact one of the biggest money making schemes of all time] but so far, no such eureka moment has occured with Facebook yet. If I were them, I’d be poaching folks like crazy from the major Web advertising companies to see if they can create their own miracle like AdWords/AdSense.

  13. I think the answer is quite simple. They are doing pretty much everything right, and nothing wrong. That is damn hard to do. They are succeeding at being both restrained and innovative. How they do that is another matter all together…

  14. So, John. Does this mean that if Facebook becomes to “online identity” what Google is to search, when you write a book about it called “Identity,” you will start it off with an anecdote of how perplexed you once were at why it had so much potential?

  15. The answer is critical mass.
    As for Google, PageRank is not a barrier to entry anymore, it’s a commodity. Google’s current barriers are cash, established publicity and established userbase.

  16. Recommendation to FB: Take the 6 billion and laugh all the way to the bank.

    Recommendation to MS: Don’t spend this you fools!

    Companies with the biggest buzz (YouTube, Facebook) have what appear to be extraordinary buyout valuations that are not consistent with their profitability or what even seems like a realistic, risk adjusted long term analysis.

    Why? Market movers as players combine with speculative frenzy and lead many to assume they’ll get out before things change. It’s more like casino thinking than Warren Buffet thinking. Big players like Google and MS can afford to make what I think they’d see as “strategic” high offers but what a reasoned analysis suggests are foolish bets.

    Lots of this happened in late 90s and only a handful of the players are left standing, most at a small fraction of their values at the pinnacle of *that* irrational exhuberance.

  17. “What PageRank is to Google, Newsfeed is to Facebook.”

    I like that. Its true. In one place, I can see who has posted new photos, who’s planning a party, who broke up with who, and basically what is going on in all of my friend’s lives. Its incredibly easy to stay in touch and still feel like I’m connected to my friends still in college, even though I recently graduated and moved away.

    Its an almost effortless, one-stop place to feel connected.

  18. I think Facebook at the moment is great! I use it a lot to keep in touch with friends, etc. Almost all of my friends that are in a social network, use Facebook, vs. another site.
    The biggest issue here is that if Facebook does in deed get bought lets say by Microsoft for $6 bil or any other company for a similar $$$ amount, they’ll very soon try to transform Facebook so that they can get a return on their investment. To do that they’ll try to get more advertisers to advertise there, etc. which will really turn off and drive users away. Users like Facebook now because it’s not filled with ads and spam, but if it gets bought that will most likely happen, which in my opinion will be the downturn of Facebook.

  19. What’s the value of FaceBook? 1/3 of my entire city is on FaceBook. 95% of my high school. 80% of the people I’ve worked with over the years. 100% of my ex-girlfriends.

    It’s the network. Here in Torono it’s larger than anything else in history.

    We’re planning an event. We invited the key people in our networks, and 1 hour later had 100 RSVP’s as yes.

    FaceBook makes new things possible. I’m not saying it’s worth 6B, or that the Applications thing will succeed. Only that this is fundamentally different than anything Toronto has seen before.

  20. Jeremy – but if 100% of your Ex’s were from Texas, then I think only about 10% of them would be on Facebook. You should consider this a statistical anomoly and save your $6,000,000,000 for more Valentines.

  21. Though I’ll not attempt to answer the question of “why Facebook, why now?” at a meta-level, I can speak to its value for me personally.

    Facebook is enabling me to simplify my digital life. Not only does it amalgamate both my professional and personal life (and, thus, presents a much more fully-orbed picture of who I am), through apps like Zoho it is beginning to fulfill some utility functions, in addition to the social ones.

    I would hope this would continue as I’d like to be able to put more of my digital eggs in one centralized basket. Afterall, isn’t that the Nirvana the coming Web 3.0 envisions…turning all these digital archipelagos into a Pangaea.

  22. I’ve got to agree with some here that question where they’re going to find a revenue stream that will scale with all the theoretical potential the tech media loves to wax so eloquently about. I read these stories everyday and it feels like I’m back in 1999 again.

    Google’s growth from the consumer end was easy to understand – they delivered a good product (at just the right time when the web was exploding) that was well executed and scaled wonderfully. I have no doubts Facebook could see similar growth based on their solid platform. But Google also had access to a proven revenue stream that could also scale wonderfully with their growth. Facebook currently doesn’t have anything REMOTELY close to that. Content and behavior-targeted advertising can bring big money but still offers somewhat limited potential, even with a MASSIVE user base (see Yahoo which excels in this area.) Viral marketing is a great buzzword but is a crapshoot at best and will not consistently bring the mega advertising dollars required to justify such a high acquisition price.

    Being dependent upon any ad-based revenue stream for that matter will actually cut against the grain of the core audience of the site. I think their best bet is to sell to somebody like Google or Microsoft which has the resources to eat any potential losses simply to gain a dominant marketshare (which Facebook still doesn’t have yet despite all the media attention.)

  23. I believe Facebook will crack the code for social recommendation search/advertising. Yes, it’s Google 2.0!

  24. Well, Google’s current market cap is $169B — So, actually $6B would be a comparative bargain. At $10B, they’d probably take the money, and MSFT would be a player in the online space — priceless 🙂

  25. I’d be a little surprised if Microsoft really bought them. Facebook isn’t Google 2.0 – it’s a whole different ballgame. As such, they’re totally in the driver’s seat. Microsoft has a lot more need for this than Facebook.

    But, hey, if someone threw $6 billion on my desk, I’d probably take it…

  26. Sorry, one more comment – this $6 billion would be MUCH better spent than the $6 billion they blew on aQuantive.

  27. Facebook is your online identity – it is better than a blog for the majority of webusers, it is addictive & allows for consensual voyeurism.

    At present facebook isn’t making meaningful money, but just imagine if they did a deal with Google or one of the other major players that allowed usered to search the web directly from facebook, & that company then shared the revenue, it could be quite big…

    They could also produce an equivalent of the Personalised homepage, containing RSS feeds of all everyones favourite websites – this could then be seen by other users and be a way of facebook pushing from being online identity to online life…

    If I were Google I’d pay whatever it takes…


  28. Google’s service (i.e. why consumers use it) is search. Pagerank is what differentiated it from the competition and made it become the dominant search engine, and the starting page for everybody.

    However it’s business today (i.e. what drives 99.9% of its revenue) is adwords. Therefore Google’s business is no longer search, that’s just the service they provide in order to present ads. And the future of that business is that of consumer profiling. In order to “improve your search” (and advertising) “experience” (and provide more targeted ads), they are compiling and integrating every piece of information they possibly can about you from your search history, entire web history, ads you click on, accounts with them, content of your google mail, and whatever else they can find. With the smartest people in the world analysing this information, they can know you better than you know yourself, build an unparalleled marketing database, and provide targeted leads to advertisers…a gold mine.

    Facebook’s service (i.e. why consumers use it) is social networking. The Feed is what differentiates it from the competition and is making it become the dominiant social network. It will become not only the starting page for everybody, but unlike Google, becomes the destination where they stay for hours. (Search is just another service for them, easy to wack it on the top line, simple deal with Yahoo.)

    It’s business? Well they are also an unparalleled consumer profiler, just like Google, only with access to different information. They have access not only to the most detailed intimate personal information that you volunteer about yourself in your profile (likes, dislikes, favourite movies, films, politicial beliefs, age, religion, education,employment etc…(BTW this alone is a marketer’s dream)…but they can cross-reference this with that in your networks. And with analysis of your communications with your networks. So they can also build an unparalleled marketing database and provide targeted leads to advertisers. Only they have more scope to be creative with it. This is not a gold mine, it is a platinum mine.

    “Yes, I’d happy to pay top dollar to present this ad to right-wing, university educated males who have worked for blue-chip finance industry, whose networks and correspondences are disproportionately weighted with females much younger than them”…Ferrari Ad Manager.

  29. Joe: I wasn’t advocating the price. Simply putting my 2c in there on where the value is. What the value is, M&A wise, is something I’m not even going to venture a guess on. 2-3B seems within the realm of reasonable. 6-20B though? Dunno. Above my pay grade 😉

  30. Nicholas illustrates how Facebook can deliver ads that are better targeted and more relevant to the individual.

    However, the problem remains: when someone is on google, they are looking for something and are more receptive to marketing that leads the user to products or information. when someone is on facebook, they are there to catch up on their peers and, as Di Di mentions, most likely do not care to be marketed to.

    Of course, there may be other ways for facebook to make money. They just haven’t happened yet.

  31. Mark’s senior team and the next tier of management who have put in 100 hour weeks over the past several years probably want to cash in now. I believe they will be ready to sell soon and probaby to Google in a multi-Billion dollar deal. The corporate cultures and audiences of these companies mesh well.

  32. wow, lots of posts here.

    The simple answer is that Facebook is executing better than any other networks. That’s really all Google does too, they execute better. But in order to be the next Google they need to execute their business model the way Google did. Only time will tell.

  33. First it was Classmates, then it was MySpace, then it was suddenly Facebook. There’s every chance that such things will implode or at the very least become passe.

  34. I’ve read all the posts and think Nicholas has summed it up best. To follow up on Charles’ criticism: Yes it is true that when using most of Google’s products, the user is attempting to find something and open to suggestion; this is not true with Facebook. However, if you combine the ‘knowledge’ about a user (the data assembled) from both Google and Facebook, think of the ad-targeting ability (think past searches, likes & dislikes, user indicated preferences — all rolled into one). This can be extended even further when viewed in the context of the DoubleClick acquisition (clicks away from a Google search will lead to pages with banner ads relevant to the page and specific user interests). I think this commands a very powerful revenue stream. Also, I used Google as the example because I think they are the best fit. I currently see Google heading in two directions: business apps and software (think Postini) and individual user interfaces (think Gmail, iGoogle, and…Facebook???–all tied into one…kinda scary).

  35. Right now, Facebook is the most talked about company in the social networking space and probably the Internet as a whole. They are in a fantastic spot.

    At this point, the Managment team can look at companies like Google and reasonably see a valuation number that may not be Google’s $169B market cap but is certainly much larger than the last reported $6 billion acquisition buzz. Even Google didnt have this beacon a 4 years ago.

  36. John,

    I must apologize in advance because most of this is actually your themes stitched together to answer your question, but none the less I liked the framing …

    While it is tempting to say “google had pagerank” I think more accurately, Google was monetizing their database of intentions. Obviously, this was only possible because they first gathered a large number of user’s intentions.

    So I think FB right now is in a situation where they have captured a large number of user’s social gestures, but we now need to see if they can monetize those social gestures. I think as marketing becomes more conversational it will become easier to monetize those social gestures.

    – Sean

  37. It’s the third-party applications that make it so attractive. Being able to view your friends’ Last.fm stuff, their bookmarks, how many people they’ve turned into “zombies”, and their “gardens” all make the site much more interesting and coherent (and much more of a one-stop shop) than any of their competitors have managed to date.

  38. Facebook at $6 billion would be a HUGE BARGAIN.

    I predict that with 24 months a post-IPO Facebook will finally begin to be discovered by the mainstream (i.e., your parents, grandparents, CEOs, etc.) as the world’s first social operating system and Facebook (and a few key app developers who wisely get on board early) will be making the kinds of defensible profits that have been reserved for the first dominant graphical operating system (i.e., Windows) and first dominant application suite (i.e., Office).

    Comparing Facebook to Google undervalues Facebook!!!

    The comparison should be with Microsoft in terms of the lock-in that can be achieved when you control both the operating system and most of the killer apps on the platform. 10% of the population of Canada is now on Facebook and this is just the tip of the iceberg in terms of how the mainstream cross-over from Facebook’s youth/college-oriented past can occur. Every consumer will benefit when all of their friends / family / business acquaintances can be reliably found, researched and touched via the social gestures that Facebook specializes in. This will ensure that Facebook zooms up to the 50% adoption levels in all key demographics that marketers care about and up to the 80% to 90% levels in many areas.

    I’ve been a software entrepreneur whose lived though the OS wars, the GUI wars, the Word processing wars, the Spreadsheet wars, the Application Suite wars, the personal finance wars, the Browser wars and now the Search wars. You’ll note that Microsoft leverage their Graphical Operating System dominance to win all but one of those wars. (BTW, kudos to Intuit/Quicken for being the exception that proves the rule.) This is the kind of market power that Facebook will bring to bear as it faces new challengers.

    In the case of Microsoft their lock-in was maintained by carefully courting, coaxing, coercing and collaborating with the hardware OEM’s and the software ISV’s. With Facebook, their lock-in will come from consumers who can’t easily decouple themselves from Facebook without giving up their network of friends and with application developers who will have to write for Facebook to reach a critical mass of connected consumers who trust their friends invitations/newsfeeds more than any 3rd party advertsing pitch (e.g., sponsored link) about which new applications/products deserve their attention.

    I may sound like someone who owns Facebook stock or is an irrational cheerleader. However, no matter how much I might like to be a Facebook shareholder, the reality is I’m simply someone who is currently making significant personal and business bets on all things Facebook.

    As CEO of Altura Ventures – the first VC company that is fully committed to the Facebook platform, I’ve made the decision that our entire investment portfolio will be made up of companies that have a shot at leveraging the coming dominance of Facebook to lay claim to the huge swaths of the virgin application territory that were opened up for an Oklahoma-style land rush the instant the F8 Platform was announced. Our Altura Ventures entrepreneurs plus 80,000+ other developers are now working to fill in every important application area at a pace that no other social network can possibly hope to match.

    Why is Facebook more like Microsoft than like Google?

    Google’s entire business is based on getting people to quickly leave their site (i.e., the outbound click that is their key monetization event). Even their very powerful, 3rd party AdSense network creates the perverse incentive on destination sites of paying them for customers who leave their site. On the other hand, Facebook’s entire business is based on bringing larger number of REAL PEOPLE closer to one another than has ever been possible before and keeping them informed about and engaged in one another’s business and lives. Clearly, Facebook’s model has huge lock-in with consumers (just like Microsoft’s) whereas Google’s objective is to push consumers out a toll-gate (where the toll is paid by an advertiser).

    Think about it this way: The number of minutes spent per month inside Google viewing Search Results (and ads) shrinks to ZERO at the limit because every search will someday instantly deliver such perfectly ranked results that all you need is a search box and the “I’m Feeling Lucky” button that takes you to the ideal destination page. In this model, you never actually see any google search results (or sponsored links).

    Imagine if Microsoft gave Google control over the IE browser search box, URL entry box, and MSN home page BUT made the “SEARCH” button routed the consumer to Google’s “I’m Feeling Lucky” destination page. Consumers would win, anti-trust officials would be happy and surprisingly Microsoft would win because Google would lose all its native-site CPC ad revenue. The reason for this is that the very efficiency of their GREAT search algorithm would mean that no consumer would ever even need to see a Google search results page where they might be tempted to click on a Sponsored Link.

    I bring this up to contrast this with the reality enjoyed by Microsoft with Windows and Office where consumers live almost entirely on Microsoft-owned real estate at both the OS/desktop and application window levels 100% of the time that they have their PC turned on. This is the type of long term viewing/interacting/connecting that occurs when you can maintain control of both the OS and the major Apps that run on it. In Microsoft’s case, they’ve found it most efficient to monetize this via license fees from Hardware OEMs and small application fees from consumers/businesses. Other monetization methods could have been used and some may be tried in the future, but Microsoft has decided to limit the full pricing power they actually have.

    How will Facebook monetize their dominant position in the Social OS and App domain?

    This is an open question that will be answered in the next 18 to 24 months (pre-IPO). Google was able to leverage GoTo/Overture’s patented bid-based CPC model to create a huge cash engine that the market clearly understood and respected. Had Bill Gross and Overture not licensed this patent to Google on the eve of their IPO, life might have evolved very differently for Google. Likewise, Facebook will be leveraging a new revenue generation model that answers the skeptics’ view that Facebook’s inhabitants aren’t worth as much to marketers as Google’s key word searchers.

    So, the interesting questions are not:

    Is Facebook worth $6 billion? Or, Is Facebook the next Google?

    But, Can Facebook get to be bigger than Microsoft? And if so, When?

    My current estimate is that after Facebook’s IPO in 24 months and 12 month’s after their post-mainstream adoption, they will be worth $100+ billion and about 25% of the way towards surpassing Microsoft’s OS/App driven valuation.

  39. It’s the user interface, stupid. That and enough critical mass that there is always something to do since everybody you know is on there if you’re a college student. The super high levels of enrollment came about because whole populations of incoming freshman college students enrolled en masse every year for the past three years.

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