Facebook's Value

Given that I've commented on the movie, The Social Network, and peripherally on Facebook, I may as well share my thoughts on the value of the company. (I'll concede up front, the company is worth vastly more than these thoughts.)

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.)

The gargantuan infrastructure investment made by companies like Google and Facebook also help them secure their position against startups. By the time a startup is ready to ramp itself up to be a possible competitor, they can either come up with investors willing to pay tens or hundreds of millions of dollars to carry them to the next level, or they can put themselves on the market. If they sit and think about what to do next, somebody else will eat their lunch. Bloglines was a really cool service when it first came out; now it's toast, with Google's Blogsearch having offered a better interface and superior functionality, and Facebook and Twitter reducing the number of people who rely on rss feeds as opposed to their "Wall" or Twitter feed for the latest buzz. In an early scene in The Social Network, Zuckerberg posts to his LiveJournal blog... and I realized that it's been years since I even gave that once dominant site a second thought.

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.)

Google Is A... Big Fat Meanie?

Yes, it's another one of the expositions on how horrible, or at least how amoral Google is for providing its free YouTube platform. After commenting on how Scribd, a service unrelated to Google, facilitates copyright violation and even allows people to "advertise services for delivering pirated books by email",

Google presents a far greater threat to the livelihood of individuals and the future of commercial institutions important to the community. One case emerged last week when a letter from Billy Bragg, Robin Gibb and other songwriters was published in the Times explaining that Google was playing very rough with those who appeared on its subsidiary, YouTube. When the Performing Rights Society demanded more money for music videos streamed from the website, Google reacted by refusing to pay the requested 0.22p per play and took down the videos of the artists concerned.

So, basically, the artists asserted their copyrights - "You can't run our songs unless you pay us the money we're demanding," and Google said, "Well, I guess that means we won't be running your songs." And that represents amoral behavior? How so?

It does this with impunity because it is dominant worldwide and knows the songwriters have nowhere else to go. Google is the portal to a massive audience: you comply with its terms or feel the weight of its boot on your windpipe.

There are lots of other ways to get your music online, ranging from the proprietary to other free video hosting services. I'll grant, YouTube has the best known brand - that's why Google was willing to pay an astronomical amount of money to acquire YouTube. But it's far from the only game in town. So what we're back to is the question of, how much is all that free YouTube publicity worth? The author falls into a predictable pattern:

Despite its diversification, Google is in the final analysis a parasite that creates nothing, merely offering little aggregation, lists and the ordering of information generated by people who have invested their capital, skill and time. On the back of the labour of others it makes vast advertising revenues - in the final quarter of last year its revenues were $5.7bn, and it currently sits on a cash pile of $8.6bn.

Imagine a library, with a billion books, all bound in identical white covers, arranged randomly on the bookshelves. There's a man sitting at the help desk. You say, "I need a book on the anatomy of honeybees." He immediately produces a list of ten books that meet your need, or come pretty close, and says, "Need another ten?" No charge! but you then notice that there's a display next to him, presenting advertisements for a few brands of gourmet honey, and honey-based face cream. Indignant, you declare him a "parasite"? I hardly dare ask the author how he feels about cartographers.¹

As with the musicians who didn't feel that Google was giving them enough return on their music, any website can demand exclusion from Google's search results. It's easy to do. And if you don't find enough value as a user, you can use a competing search engine. The author complains that newspapers have not adapted well to the emerging electronic world, and trots out Jefferson on the importance of newspapers to democracy, but what's happening is much more complicated.

We have a democratization of speech that Jefferson could not have imagined, and there's no reason to believe he would have found it unsatisfactory to have the news available to him more or less "as it happens" through a computer screen as opposed to a daily delivery, printed on paper. The author complains that the newspaper business has "to give its content free to the search engine in order to survive" - that's true to a degree, but only because Google delivers traffic to the newspaper's websites. Other than AP, which is hosted on Google because it wants to be, Google doesn't make the full text of newspaper articles available. It offers the headline and a snippet, and you have to click the link to read the rest.

The scary part about the declining newspaper industry is not that billionaires like Rupert Murdoch see their fortunes decline, and angrily spew about how Google is stealing, no make that taking, news articles for free. It's a bit like getting angry that people can read headlines and the lede to top stories through the window of a newspaper box. Or the fact that those boxes even exist. If your business is going electronic, you have to develop sources for your traffic - and right now, that means working with Google and Yahoo.

Finding ways to make money from that traffic - particularly in the amounts necessary to float a traditional (quality) newspaper's reporting and editing staff? Yes, that's difficult. That should concern everybody, but it's a development that's anything but Google's fault. (Rather than complaining, perhaps newspapers should take a look at what Josh Marshall has managed to put together in terms of a purely online, professional news service, and wonder what they could have done given that they have, oh, a billion times his resources.)

Here's something for the author to ponder. YouTube, the wonder site that musicians just can't live without, is not the source of Google's wealth and success. Quite the opposite:

A new report by Credit Suisse projects that video-sharing giant YouTube is on track to lose $470 million this year, writes Multichannel News.

Credit Suisse says YouTube will generate $240 million in revenue, but those revenues will be dwarfed by the $711 million in licensing, hardware, marketing and other expenses the site will incur.

You know what eventually happens to ideas that lose $500,000,000 or so per year? No matter how big the company subsidizing them? They get cut. You are free to argue that Google "can afford" to lose that much money, or even more, but if you truly believe that YouTube is crucial to success in the world of music, perhaps it's time to stop complaining and start coming up with ideas to monetize YouTube traffic.²
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1. The author raises some issues about Google's privacy policies, information retention, and other similar issues that are worth thought and discussion, but makes them little more than a footnote.

2. I suspect that I'm asking too much. I would guess that, should YouTube fail, we'll be hearing yet another version of the same complaint from the same author. Newspapers cut their unprofitable print publications and go online, where they depend upon Google to provide them with free traffic? "Google takes without paying! Google bad!" Google pays artists a licensing fee for their music on YouTube? "Google is profitable, so it could pay more! Google Bad!" Google closes its unprofitable YouTube site? "That's invaluable to musicians! Google bad!"

Rick Who? YouTube and the Music Industry

If you're not familiar with the phenomenon of "rickrolling", it's a running Internet joke where you pretend to link to something of great interest and, when the target of your joke clicks the link, you instead direct readers to a video of Rick Astley's singing "Never Gonna Give You Up". This joke has brought attention to a singer who few who had otherwise heard since the late 1980's, resulting in a 2007 comeback and Astley's winning the "Best Act Ever" award at the 2008 MTV Europe Music Awards. In other words, a huge amount of fame, attention, and no doubt money flowing directly from Astley's presence on YouTube.

As far as I know, Astley has no complaints. But in the context of an effort by British artists to get more money from Google for YouTube videos, that hasn't stopped the co-author of the song from crying "foul":

Speaking to the Sun newspaper, Pete Waterman, the man who co-wrote the 1980's hit (as well as a slew of other hits as part of the Stock Aitken and Waterman trio), said that Google only paid him £11, that's 27.5 pennies per million views.

Google, which earns £3 billion per annum, claims that PRS, the body representing songwriters and other artists in the UK, has been asking for a royalty fee per video that was way higher than what it used to be before, which meant that Google would be losing money each time a video is viewed.

If Waterman hasn't seen a huge spike in royalties as a result of Astley's resurgence, something that would not have happened but for YouTube, the problem isn't Google's royalty payments - it's that Waterman was a lousy negotiator back when he wrote the song.

Really, it's a bit like my hacking navigation systems so that when people asked to be directed to their favorite restaurants they were instead taken to a performance artist - let's say, a mime doing "man in a box". Almost none of them have any interest in the performance, particularly if they've "fallen for the joke" before. Even fewer of them will notice that there's a billboard for a car dealership in the vicinity of the mime. And almost none will be inspired to check out the car dealership as a result of the misdirection. That's similar to how rickrolling works, except Google isn't the one playing the joke, has to pay for the mime (the server load and bandwidth necessary to play the video, plus a royalty to Marcel Marceau for originating the mime's act), and is trying to pay for it all with ads that only generate revenue when somebody acts on them.

You can argue, "Google benefits from the notoriety they get from having these videos online". Well, quite obviously, so did Rick Astley and, thus, so did Pete Waterman. If that's irrelevant, then the question is, if you just got £11 in your pocket that you would otherwise have never received, for doing no work and expending zero effort, why are you complaining that the company that gave you the £11 isn't also losing money on the deal?

I'm not unsympathetic to the artists, but this makes for a lousy example of the injustice of Google's royalty scheme.

It may be hardball, but I understand Google's taking down the videos in response to the artists' demands. If the deal is so bad for the artists, why are they upset that their videos aren't available on YouTube? Could it be that, yes, all that free publicity is worth something after all?

Pete Waterman's arguments in the Sun are strikingly pertinent especially when he says "Nobody buys music they can get for free on sites like YouTube." Youtube doesn't only encourage creation, it often fuels plain piracy much to the disregard (and displeasure) of the rights holders.

Then why is this even a debate? Why isn't he demanding that Google take down the video, so he and Rick Astley can get back to making money through obscurity?

Even in the context of criticizing Google, Billy Bragg observed,

Digital technology is the best thing that has happened for performers and songwriters since Thomas Edison invented the phonograph and made it possible for us to earn a living from something other than live performance. Recent developments in audio technology have made it possible for anyone with a laptop and a connection not only to make their own music, but also to distribute it around the world.

And no small part of that opportunity comes via Google and YouTube.

If you want, you can open a YouTube channel, post your own videos, and try to make money through commissions on Google's ads. Or you can do the same while embedding the video on your own website. Or you can bypass Google altogether, and create your own individual website while hosting your own video files, or hosting them through a service other than Google. And you can still put Google ads on that website to try to make money. Or ads from another service. Or ads you sell yourself. Or your concert tickets and band merchandise.

The notion here seems to be "Google has lots of money, and plays our videos on one of its web properties, so it should pay us a ton of money." If Google were making a ton of money off of those videos, I would agree with that. If the artists were telling Google, "Look, it's easy, do the following three things and you'll be making tons of money," I would say, "C'mon Google, give it a try." But the fact is, nobody knows how to turn online music videos into a profit center. It's possible that there is no secret - that online video will never generate much revenue, in which case artists can choose between the other benefits of being on YouTube (primarily free publicity) and the supposition that taking their videos off of YouTube will increase the sales of their recordings.