Saturday, October 09, 2010
Facebook's present reported revenues and earnings easily justify a seven figure valuation. As Fred Wilson pointed out a couple of years ago, if Facebook were to significantly scale back its staff and operations it would likely be able to show both an impressive profit and continue to grow. Expenditure beyond the minimum has since helped Facebook continue to expand its subscriber base, come up with new ways to generate revenue and cement its status as the dominant social network. The others seem fairly categorized as niche players and has-beens. (No offense, MySpace; you're a respectable site but it's "innovate or die" time.)
That said, there's a ceiling on how many active users Facebook can accumulate, and a lower ceiling on how many active users will actually return value for the company. That is to say, there are only so many people in the world and not all of them are viable targets for advertising. Back in the early days of the Internet a lot of attention was given to how many "eyeballs" a site generated, with the assumption that any given set of eyeballs was of approximately equal value. We now know better. And while it's true that Facebook has become for a huge number of people their doorway to the Internet, and many never leave its confines, the same was true of AOL. Surely, Facebook has examined and learned from AOL's collapse, but you can only learn so much. Recall also that AOL's fantastic market valuation was premised upon the potential of its huge subscriber base, but they had no actual or even theoretical business plan that would have justified their valuation if broken down to a per-subscriber figure.
Facebook also reminds me of YouTube, by all means a dominant video site and a great brand, but a site that even with Google behind it has difficulty demonstrating its value. When I look at the technology Google has developed around YouTube, and the lessons it learned when high demand for certain videos almost brought down its network, I can say that it wasn't as bad an investment as many suggest. It helped prepare Google for a high bandwidth future and for its inevitable entry into commercial streamed video, as well as providing an impetus to improve its voice recognition technologies (among others). But had YouTube not found Google as a suitor, or had it been purchased by a company with lesser resources, it likely would have collapsed under its own weight. Would AOL have been able to carry those losses had its bid prevailed - and would AOL still be around as an independent company had it tried? Would Microsoft have been willing to perpetuate YouTube, or would it have simply merged it into its own video service?
Google's CEO recently expressed that he wants Facebook to share its data - and that there are other ways of getting the data if Facebook won't share. The biggest advantage YouTube has is that pretty much "everybody" who is online has a Facebook account. Its competitors are eager to take that advantage away. I don't think Google is particularly concerned with building a Facebook killer or with the competition offered by Facebook in its present form, but perhaps that's another lesson of YouTube - keep FaceBook in its place, groom it as a partner, and operate from a policy of containment. Let them figure out how to improve their low returns per member and per pageview while you focus on operations that offer a significantly greater return - and partner with them so as to become both a needed revenue stream and to keep them from developing competing products within those areas of profit.
When I hear a ten figure valuation for Facebook I think, sure, that's realistic given its position, revenues, and barriers to entry. As the valuation creeps toward or into the eleven figure range, though, I admit skepticism. (Others are less skeptical, but they seem to assume that Facebook's business will grow in a vacuum. As Google demonstrated with Google Buzz, it can expect that its competitors will act aggressively to create competing social networks, and with its acquisition of SocialDeck, they will also act aggressively to both control and to be able to offer on their own sites some of Facebook's more compelling content.)