What is the value of global friendship and can you actually assign a price to it? Facebook’s own stats say that the site now has more than 500 million active users, and that 50% of them log on to Facebook in any given day. That means Goldman Sachs’ implied valuation of $50 billion suggests every active user is worth around about $100.
Is that a lot? I actually don’t think it matters. The much more interesting question is: $100 – to whom? Users are not paying money to talk to their friends, post their photos and catch up on what’s going on as they generate content on Facebook, but if Goldman Sachs is right, then that’s what their millions of activities will generate for someone else.
So who’s anticipating the $100 of value, and just as importantly, how? Investors, yes. But based on the production of what?
There have been any number of comparisons between Facebook and Google – but to me, they overlook a fundamental difference. Google does produce something: a very powerful search engine, based on a ‘secret’ algorithm. Facebook is much more of an environment.
Facebook’s valuation is about 25 times revenue for 2010 according to this article in Bloomberg (that means Goldman Sachs would have to wait 25 years to even draw even on the top line) and, perhaps inevitably, that’s generated bubble talk. A quarter of a century is a long time for any business. In the world of online commerce, it’s unprecedented. So perhaps it’s no surprise that an article in Fast Company reports that 69% of investors who took part in a Bloomberg global poll thought that Facebook is overvalued. Just 10% thought it was “properly valued”, 4% thought it undervalued and, interestingly, 17% (a little under one in six) had “no idea”.
I asked Mike Tisdall about this – and his view was that the extended timeframes only apply of course if the current year’s profit remains static. His view is that Goldman Sachs are counting on that profit growing exponentially over the next few years. Yes, Facebook’s profits have grown in recent years, but $500 billion’s a long road don’t you think?
Conventional market wisdom of course says the value of a Facebook-type offering will commoditise. But then, how does commoditisation play out if users are paying nothing now?
The only way that I can see it happening is if those expecting to receive $100 of value per user now (and presumably more over the years ahead as the numbers swell) come to believe that target is unrealistic. Patience could well be a factor – if they become impatient, what price would they take to get some return on their investment? And how would that affect the markets?
There are of course any number of other factors that could jeopardise value, triggered not by the investors themselves necessarily, but perhaps by the community – a sudden exit via a shift in fashion, for example, a spooking based on concerns about privacy, unexpected disclosures or new moves by Facebook (perhaps to reinforce the value in the business model) that participants find unacceptable.
The other thing we can’t know is what’s the critical exit rate? If 10% of regular users left, would that take the momentum out of the business model? Would it take 5% – or 15%? The lesson from Tunisia and Egypt is that once crowds get going, things happen pretty quickly.
Then there’s the whole situation of an environment like Facebook going public – does that mean that if its market price does go up, participants are essentially working for the institutional investors for free? Or will the IPO itself be crowd-based? In which case, governance could be interesting.
I foresee complications.
And the temptation to return to the conversation we had ten years ago – that one that starts it’s a different business and therefore traditional valuation models don’t apply. Remember where that one landed? Come to think about it, remember where we’ve just been? That was all about valuations too as I recall.
The delicious irony of a crowd-based brand, and something to keep an eye on with the proposed social media floats, is that brands such as Facebook, Groupon and LinkedIn become both stronger and potentially more vulnerable as they grow. On the one hand they are looking to consolidate and express value on the board; on the other, they rely for participation, validity and volume on a dispersed community whose views and reactions to going public are the real speculation.
