Facebook - valuing the billboards on your digital pathways

It's been quite interesting, that despite all the predictable booster hype, quite a few articles out yesterday on the actual value of Facebook feel $100bn might be too high - to me the real shocker was that even Henry Blodgett doesn't think it's worth $100bn at the moment (a core value of c $75 according to his calculations). I await Mary Meeker's pronouncement with eager anticipation

And of course a few of our troublemak... loyal readers asked me the same question. What do we at Broadstuff Towers think its worth?

Well, the analysis we did yesterday would suggest that if you think it is the "next Google" then its about 1.75 - 2x overvalued compared to Google at IPO, so c $50bn - $60bn would be a much safer bet. If you think its "worse than Google" then head for the hills now, if you think it is 2x better, then buy - but you need to know why you think this. Based on the Broadstuff Digital Bubble Atmosphere Exposure* methodology, I'd estimate it will have an IPO valuation of c $75 bn +/- 10%

So the real question, assuming you are in for the long haul, becomes "how sustainable do you think it all is" ?

There is a nice article on Slate today asking if Facebook is a Good Company that goes down this line, and this comment hit me:

Facebook’s all-encompassing mission to “make the world more open and connected” seems positively zany. It’s not only that Facebook is ambitious; lots of Web companies, especially Google, strike the same revolutionary tone. What’s different about Facebook is its product: Facebook is us. You go to Google for Web pages, you go to Apple for computers, and you go to Amazon for stuff. What does Facebook give you? Me and you and everyone we know. Or, to quote another movie: It’s people! Facebook, is made out of people!

As far as I can see, Facebook's "analogy" business model today is mainly to erect billboards on our digital social pathways, and try and get us to turn off the road every so often to buy digital souvenirs. If this sounds suspiciously like the "eyeball" arguments that launched a thousand failed dotcoms, you'd be right. To succeed therefore, it needs to navigate the travails of its own S-1 warning:

If we fail to retain existing users or add new users, or if our users decrease their level of engagement with Facebook, our revenue, financial results, and business may be significantly harmed.

But its also more than that - it's not enough that they don't fall - to justify this valuation over time, these things all have to go up, by more than an order of magnitude by our calculation.

And the next 800m users will not be as wealthy as the last 800m, and after that there aren't many left to find - so additional revenue is not going to come from a pure volume increase, but from a value per user increase. So you have to believe that there will be more money from our mobile usage, more user activities to keep you on the site, more games played, more billboards, and - The Ultimate Goal - that the billboards will be far more targeted than anything that has come before so advertisers will pay far more per view than today.

And to do that you have to intrude on privacy far more than anything has done before.

And for that to be viable you have to believe there will be no backlash to further privacy erosion, social or legal.

Which I don't. We have neen tracking concern about privacy, and it's been growing quite rapidly in the last 2 years.

Which means that Facebook's core business is going to get harder and less profitable to run over time. I don't believe there are major new economies of scale after 800m users, so no new scale benefits. So it comes down to whether you believe they can use the $5bn or so they raise to buy their way into more stickiness and newer, better and more profitable revenue streams. Which I don't believe they can do, at least in the short to medium term (I cite Skype and YouTube as evidence).

I do believe that if anybody can pull it off it is Mark Zuckerberg, he has successfuly navigated all the landmines to date - but he has done it with majority ownership of a private company. But can one do the same with a much scrutinised public company, is the (tens of) billion dollar question?

*Take your digit, expose it to the atmosphere....(Actually, I read a paper once that argued asset bubbles inflate underlying values by an average of c 40% - it was on the Internet, so it must be true....)