MSFT & Facebook - like 3G licences all over again.

Just when you thought it couldn't get sillier - the Wall St Journal reports that MSFT is willing to shell out $500m for 5% of Facebook (valuing it at c $10bn) whereas F/B is reportedly more keen on a $15bn valuation.

This is exactly like the 3G licences again - what you have to believe in order to think the average customer is worth that price is at best irrational, and thus the deals are being based on "strategic reasons" - aka Deal Fervour.

As Warren Buffet once noted:

“[When] a C.E.O. is encouraged by his advisers to make deals, he responds much as would a teenage boy who is encouraged by his father to have a normal sex life. It’s not a push he needs.”

So...a bit of fag packet maths here - $10bn valuation, assume it gets to MySpace's size today before the next New New thing comes along in 3 years, that's say 120m users so its around £10bn for c 360m useful user-years before it goes the way of all SocNets (40 + 80 + 120 +80 + 40) - say $30 per user per annum - or $45 at a $15bn valuation.

US GDP is about $13 trillion, Adspend as % of GDP is about 2.3% (say c 300bn), population is c 300m - ie the US forks over c $1000 per capita per annum in advertising.

Facebook needs $30 - $45 per user year at this valuation, ie 3% - 5% of all that US Adspend per person - problem is the entire Online Ad industry is only about 7% of that pie now, will be c 10% in 3 years time, maybe as high as 14% - so F/B needs between c 25% and 50% of all Online Ad revenues per head for its customers to cover that valuation (more in fact as US GDP and % of GDP to Ads is higher than RoW).

Even if you assume Facebookers are worth 2 x the US mean for Adspend, its still a big ask.

Now, more playing with numbers - Web 1.0 Bubblemeister Henry Blodget forecasts these revenues for F/B

2007: $150 million ($200 million? $250 million? Who cares?)
2008: $750 million
2009: $1.5 billion

Assuming that ARPU does not increase hugely, that assumes a 10 fold increase in customers - ie F/B goes from 40m users to 400m users in c 3 years. At MySpace levels of ARPU (about double Facebook's) thats a "mere" 225m or so users. Well, the population of Planet Earth is only an order of magnitude higher than that, so that is still one huge ask, especially given that there are increasingly loads of other SocNets out there. One can believe that ARPU will go up (MSFT clearly does given the valuation), but there are still macroeconomic limits - $1.5bn of Ad revenue is still c 0.5% of total Ad revenue, its still c 3% of all predicted global online Adspend (c $45bn by 2011).

And we have to ask "what is a user" - if experience of other SocNets is anything to go by, many of those users are pretty dormant, there will be multiple signups etc - 1 in 10 is probably a more useful estimate of actual cruisin' users, which make the valuations even harder..

Oh, and if they must do the deal try not to give the kids all the loot in cash up front, like certain others have done....

But the question remains - how can you pay (implicitly) $10bn for a company with projected revenues of c $2.3bn before it is in real risk of falling away as the next thing comes up?

And that $10bn is about 9 - 12 months of Microsoft profits eaten up as well, just to give a feel for dealsize - no problems there in digesting it then ! Even Google looks more like it wants to build rather than buy. And to buy 5% of an entity - that's zero control......hmmmm, the only people who will pay this are "us" methinks - do I smell an IPO in the offing

Postscript - I read this post by A VC (Fred Wilson) with a mounting sense of amusement:

I think the valuation, which many are focusing on, is not the issue to pay attention to here. The $20bn valuation that Google paid for AOL wasn't a real price and the $10bn valuation (or more or less) that is being discussed isn't real either. By "unreal" I mean that it's unlikely that financial investors would pay that price or that anyone would pay that much to buy the entire company right now.

Fred quotes Yogi Berra elsewhere in his passage, but I felt it applied more to his argument above....the valuation is totally the issue as from it stems all resulting behaviour....seems like deja vu all over again