Is Facebook Overvalued? It depends on how you answer one simple question
The Economist conducted a poll on January, 2011 asking the readers the same question – “Is Facebook overvalues at US$ 50 billion?” At that time it was valued around US$ 50 billion. Here is the result:
Since then lot has been said and written about Facebook valuation and the valuation has also gone up to US$ 100 billion. But, the argument persists. Both sides are strong in their belief.
Gartner, in a recent report titled “Current States and Future Directions of the IT Industry” states:
“…evidence continues to mount, highlighting there are few forces more powerful than the influence that friends or peers have on consumer buying decisions…”
On the other hand, Forrester, in a report titled “Will Facebook Ever Drive eCommerce?” states:
“…for most eBusiness companies in retail, Facebook is unlikely to correlate directly to near-term sales. A few pockets of success, however, have surfaced… while Facebook disciples believe that there will be something that will in the future transform shopping, the truth is that large brands just have not experienced any sizable gains in direct sales from Facebook…”
So where does it leave us?
What is your answer this simple question?
Ultimately it boils down to this one question. How you answer it will place you either in the “Yes” or “No” camp.
Can Facebook monetize the very detailed demographic profile and social-graph data that it will have for one billion users without alienating them?
Monetize = Generate ad revenue = Provide measurable increase in sales for the ad spend
Monetize = 10 billion US$ as annual profit to justify 100 US$ valuation
True, Facebook can make some money from the developers and by selling other things like music, movie etc. but that is already a crowded market. Major revenue has to come from selling ad.
It is not going to be easy.
People go to Google to look for things so targeted advertising can in many ways be helpful to the user. When people go to Facebook, they go to see what their friends are doing. So, ad can become an intrusion.
When Google went for IPO it had already figured out how to make money for 3 years prior to IPO. Facebook has not yet figured out how to be profitable. They are trying many ideas and hopefully some will succeed.
- Inside Facebook: June, 2011 – Facebook Testing Home Page Design That Keeps Ads and Bookmarks Visible as You Scroll
- Fast Company: June, 2011 – Facebook To Launch Crowdsourced Ad Format Next Week
One billion user = Sure to have from current 600 million = Likely to saturate
Facebook is the most visited site in US (see this). It accounted for 8.93% of all US visits between January and November 2010 and now has more than 500 million active users. Half of Facebook’s users come to the site at least once a day. The user base has been growing at an incredible pace.
However, there are indications that for a country number of users tend to saturate at about 50% of the internet users. (see this interesting report)
Without alienating them = Showing too much ad = Move to the next happening platform
It happened to MySpace. In 2005 News Corporation acquired MySpace for US$ 550 million (see this). At that time MySpace attracted the fifth-most page views of any Web site. Last month, Specific Media takes the site off News Corporation’s hands for US$ 35 million (see this).
Having one billion users is no guarantee that there is no mass exodus. Who ever thought that Lehman Brothers can collapse in such a short period of time?
There is already some evidence that users are not that satisfied with Facebook. ASCI (American Customer Satisfaction Index) rates companies based on thousands of consumer satisfaction surveys. Maximum possible score you can get is 100 – higher the score, more satisfied are the customers. Here are the scores – not much difference between Facebook and MySpace.
Google = 80, Wikipedia = 77, Bing = 77, Yahoo! = 76, MSN = 75, AOL = 74, YouTube = 73, Ask.com = 73, Facebook = 64, MySpace = 63
Can we predict the future?
As you can guess by now that I think Facebook is not worth US$ 100 billion. To me it looks like a bubble created partly by Goldman Sachs. Check these:
- Infoworld: January, 2011 – 50 billion reasons why Facebook is not worth $50 billion
- The New York Times: January, 2011 – Goldman’s Mutual Friend
- The Wall Street Journal: January, 2011 – Facebook Deal Spurs Inquiry
However, it is always good to remember that you cannot predict a Black Swan. Just go through the following post, a 2003 vintage: