Is Facebook Worth $1bn?

I guess it depends on who is buying it.

I am a shareholder of Yahoo! and I wouldn't be upset to see them pay $1bn for Facebook. They need a strong social networking platform and 360 isn't going to cut it.

News Corp paid half that price for MySpace and time has shown that to have been a smart purchase.

Clearly Facebook doesn't have the same traffic that MySpace has.

According to Comscore Media Metrix, MySpace had 55mm unique visitors last month and Facebook had about 15mm. So MySpace is almost 4x bigger than Facebook.

And Facebook isn't growing that fast. Here's a Comscore Media Metrix chart of Facebook's growth in page views over the past year.

In fact that chart shows another of Facebook's challenges. They have a seasonal business. When their students are on summer break, traffic goes down. So it's not surprising that they made the decision this summer to open the service up to everyone.

I asked Jessica, who is a Facebook fan (she switched from MySpace when she got to high school) about the possibility of Yahoo! buying Facebook. She was fine with it, as long as "they don't change it". She's not happy about the opening up of Facebook to everyone. She liked it because it was exclusive. Not everyone could be a member.

When I told her I had a Facebook profile last month, she was shocked. That shouldn't happen in her view of Facebook. She says that MySpace has "sketchy old men" on it and Facebook doesn't. She's worried that Facebook is going to become another MySpace and if it does, she'll move on.

So Facebook and Yahoo! or any other buyer faces a difficult choice. Open up Facebook and let it compete on a level playing field for UVs and PVs with MySpace or keep it closed and limit the upside.

The $1bn price tag that has been floating around makes this choice even more difficult. I am going to need some help from all of you so please chime in on all these assumptions in the comments.

Let's say that you think Facebook will get to 10bn page views a month shortly. Let's give each page an effective CPM of $1. Then that's $10mm per month in revenue. I am not sure if I should add the Microsoft deal to that number or not. I'll hedge and say that they can be a $150mm/year revenue company near term staying fairly closed.

But if they open it up and get to MySpace numbers (~35bn page views a month), they could be a $500mm/year revenue company near term.

The latter approach could easily justify a $1bn number from Yahoo! But it also would require them to really open up Facebook and that could sow the seeds of its eventual decline.

The other issue is how much margin is in the business. At face value, it seems like a fairly low cost business to operate. They don't produce content, their users do that. They develop and improve the service and operate servers and buy bandwidth. It wouldn't surprise me if Facebook could produce $50mm of EBITDA on $150mm of revenues. So $1bn would be 20x cash flow on a theoretical near term revenue number. Again, please chime in on all these numbers, this post is a rumination more than anything else.

Doesn't sound too bad to get a premier social networking platform with some unique properties. I think Yahoo! shold pull the trigger on the deal and commit to keeping Facebook a lot more protected than the wide open MySpace. I think that strategy should work for them.

Here's Michael Parekh's take on the deal. He likens it to a return to Broadcast.com and Geocities days. Sure, there are some similarities, both the billions on the end of the price tag and the kinds of services they represent (video and community). But this time around, the price tags have some relationship to earnings and cash flow. We may be in a bubble of sorts, but it's a different kind of bubble for sure.

Comments

[Rick]

If Facebook wants to increase its valuation, not only should they open it up to creepy old guys, but also pornstars and tv/movie characters.

Then they should replace their database servers with old crotchety units that create lots of errors.

They also should make their users re-login in random places.

Suddenly, that pageview gap between FB and MS would disappear.

[kid mercury]

i dont understand why yahoo is even considering purchasing this, especially at the outrageous (at least in IMO) price of 1 bn. consider:

1. collegiate mindset of management -- that alone is enough to turn down the price tag if not the whole deal.

2. where is facebook going? its value comes from being closed, as illustrated by jessica's opinions. i'm a bit skeptical of closed social networks -- the idea seems contradictory and irreconcilable -- but if they are going to go the closed route, then that means advertising needs to benefit advertisers' brand via association with elitism, right? i dont think this will work for branding. and if they go the open route, then they compete directly with youtube/myspace, where they will lose, and will alienate their core users. and this means lower CPM as well.

3. if yahoo is just looking to get into the social networking game (and i agree 360 doesnt cut it), then fine, although i would like to see yahoo sort out how they are going to use user information before they go about acquiring more and more of it. their ad solution is not where it needs to be, not even close.

[cfw]

First, get the price properly distributed - Yahoo should insist on setting aside $200 million or so to promptly go to the producers of content - the college kids primarily. Then run the company with content providers periodically compensated at least a bit - like USAA (where insurance policy holders have subscriber accounts and share in financial rewards).

Second, expand the network gradually, like USAA did to senior NCO's, retirees, kids of military officers, and finally anyone in the military. Ideally the expansion of F comes from within - college folks bringing in their friends, siblings, as they mature, etc. rather than based on rules purely from the "suits." Making it a partly "user owned" enterprise would make it easier to get ads accepted and appreciated.

Third, make the company earn the price over say $500 million, by getting results.

If the company went up for auction, it would not sell for over $500 million now, in my view.

It does not look like F has a lot of other serious buyers who could (or would) swoop in and do better than $500 million now. What would Microsoft, Fox, GE, Disney, Google pay? How hard would it be for someone Disney to build a better F? Not very hard, if the suits behave like they have the last 2-3 months.

[Erik Schwartz]

I think you need to ask why Y! 360 isn't cutting it. What specifically does FB do that Y! 360 has failed to do? Could facebook continue to thrive in the "big purple" environment.

As a technology buy, buying FB is silly. Buying existing communities (and not destroying them) is a perilous business. Buying FB would not be buying reach, they already reach that audience.

At the end of the day you're buying people who are passionate (and talented) about building community sites. But they could buy that passion for a whole lot less money by buying number 10 than buying number 1. Sconex sold for 8.7 million dollars.

[dave]

I still don't understand the social networking thing.

If I want to socialize and/or network with people the last thing I want do is sit in front of a computer.

Until someone can explain to me the benefits that redound to users sitting in front of a computer instead of, say, knocking back a few at the local bar (or, for the high school kids, hanging out at the mall) I will consider this yet another example of the cluelessness with which dot-bomb companies acquire assets.

[Stu]

Generation Y is huge, and Facebook seems to have a lock on the sweet-spot of the elusive Gen Y at the moment.

Making, Facebook the best ramp, into succeeding among one of the best demo trends out in the marketplace.

It is a huge wave to ride, and I suspect it one of the reasons, that the smaretest businessman, in the world, Oracle of Omahis, invested in Anheuser-Busch, in the past year.

Great leverage for the Facebook Founders.
Marketers, can't miss the opportunities, created by the entry of all these Gen Y'ers, into their 20's.

[Steve Poland]

Different Perspective: I know all the hype is around a purchase of Facebook, but the other social networking site that I've heard has been on the sales block in the past is Friendster -- and despite less "buzz", their traffic/userbase has been on an incline for the past year (and is higher than Facebook). [Facebook was seeking a buyer at ~$200mm in early 2005, then ~$50-$100mm in early 2006; cheap!; but as of last month claimed they weren't for sale anymore -- which I bet they would change their minds if the right price/partner comes.]. Granted, it's a different demographic (older, have income, larger purchases like autos and financial-related services), but could be a good purchase (particularly if it's less than $1B). I wrote an in-depth opinion piece about Why Evite (IAC-owned) and Friendster need each other. But really, this could easily be titled 'Why Upcoming.org (Yahoo-owned) and Friendster need each other. Friendster is a BUY in my book.

[Kyle]

I think that Facebook will be worth the higher price if they play their cards right in the next few months. With the shift to the news feed, it seems like they're moving away from impression-based advertising. I ran some ads there for a client and the click through rate was atrociously tiny, so it seems to make sense that they'd be steering away from this model. I'm not sure this is what they're consciously doing, but by giving everyone in your social network a blow-by-blow of your actions within that network, more specifically, showing the groups you join, they've created very high potential payoffs for their advertisers who use sponsored group.

Combine a group with a good title and some sort of reward, and you'll see messages showing up in the news feed saying "8 of your friends have joined Group-X." It's an explicit social recommendation. And I'd venture to guess that it'll be more effective in the long run than other forms of advertising as the signal-to-noise ratio continues to climb steadily.

[Jim Eiden]

Wasn't Snapple sold for over $1 billion? Look what happened there.

Remember the HP Compaq merger?
Carly Fiorina lost her job over that one.

I don't get it. I see this constantly. Why does one company buy another, then get rid of all the people that made that company the unique and valuable fir mit was in the first place? Why buy Facebook, when Yahoo is goingto get rid of all the Facebook people and run it like Yahoo? By doing this they will have stripped away the value that was facebook in the first place.

If company A buys Company B, then they need to do it in such a way as to maintain the essence of company B, otherwise it is just $1 billion down the drain.

I bet for $1 billion, Yahoo could create their own social networking platform that would blow the others away.

[matt]

don't forget Mixi - Japan's most popular SNS - recently IPO'd and now has a $1.9b market cap. If Japan can do it, the US surely can :)

Here's a good take on the IPO:
https://fukumimi.wordpress.com/2006/09/15/mixi-ipo-day-2-review-and-my-latest-swipe-at-techcrunch/

[Jonathan Marcus]

How about simply keeping the network restricted to the College market, and focusing on increasing its CPM (via increased value add)? Vertical expansion by providing additional value to its existing user base / demographic, rather than horizontal dilution; there is a reason you assumed $1 CPMs. Vertical expansion, and a strict focus on its core constituency is an incredibly more defensible position over any sort of time period. Opening up access to a broader demographic is an incredibly bad bet of the company - may, or may not work, but risk adjusted it doesnt make any sense. If absolute # of eyeballs is all that matters these days, then perhaps we havent made any substantive progress in business model thinking from the bubble.

[Chris]

If Facebook opens up to everyone, what exactly is their context for interaction? Before it was about school, and it maintained exclusivity to strengthen this.

How can such an aimless facebook possibly compete with myspace?

Therefore, I would have to strongly disagree. It would be very difficult to innovate with this direction (or lack thereof). Facebook would be easily displaced, by either MySpace, or any other competitor in the future.

[steve]

my god, memories are short. after spending $4.5 billion to buy the ORIGINAL "social media" company, GeoCities, and turning into a literally forgotten also-ran, what in the world would make yahoo think they could ever get a return on investment spending $1 billion on facebook, which is a fraction the size geocities was, and even smaller compared to the then and now total universes?

if this is in fact real -- and the news story "leak" looks suspiciously like a facebook/VC attempt to get Y! anxious and afraid others will jump in (where *did* that non-news story orginate from anyway?!?) -- then this is semel and company shamelessly pandering to the public markets, attempting to buy sizzle for their stock when their sizzle is waning.

blecch. with all the awesome assets and opportunities on their plate, what in the world is yahoo doing even wasting time thinking about (over)paying gargantuan sums for assets they know they can't monetize, radically promoting the contunuance (and forward value) of trends they know will shift hard and sudden and often.

if i was a yahoo shareholder, well, i guess thats why i am not a yahoo shareholder.

[mark pincus]

what does facebook look like at a $2 cpm?

[uday]

I loved the way Google's orkut teamed up with Nike to create joga.com, a soccer-centric community that invited people based on demographics.

Specially branded communities like this are probably the only bells that will ring the cash registers for social networking efforts in the future.

While it makes sense for FB to be bought over and walk out in an unpleated shirt, they might want to seriously consider staying in the game by building portals for niche brands which focus on Generation Y market, for e.g. video game accessories, wireless/mobile communication equipment, music gadgets etc.

[AlfromChicago]

Great post, Fred -- I just wrote a post building on this: http://www.participatemedia.com/?p=26

Net net I think $1B is a conservative valuation

[Mark]

Isn't an important difference between a potential facebook deal and the broadcast.com and geocities deals is that yahoo and other recent acquirers are now playing with real money (cash) not "funny money" (inflated stock). As a result, I belive the diligence and planning being done pre-deal is far more thought-out this time around.

[Chris]

I would poke a few holes in some of the assumptions in the above post:

- "Uniques" is a measure of reach, and fine as an apples-to-apples proxy between sites, but not useful for a bottoms-up company valuation. Internal figures *always* differ greatly from panel-based measures, and more importantly, unique visitors offers no insight into engagement (as does "streams daily," per your YouTube post).

- Geocities' purchase price reflects what might as well be another era in terms of the macroeconomics in play at that time (same with Broadcast.com as a proxy). Ad dollars allocated online were a *fraction* of what they are now, and stock market valuations were far-less-tied to free cash flows.

- The use of a $1 CPM might be a "worst case" figure to keep all numbers round and low, but surely Facebook can do better. I was among those who hammered on the point that $15 was an overly-high assumption for your YouTube post, but this appears to be an over-correction in the other direction. I think a $5 CPM is more accurate, which would justify the $1bn valuation.

I agree with those who encourage Facebook's continued, vertical focus, and would hope that YHOO "let's it live" as its own property, and disagree entirely with the "open it up" mantra in some of the above comments.

[Lloyd Fassett]

The model is incomplete. They need too add more exciting sources of revenue. 20X current cash flow is too rich for the current model (20 years!). We'd need to know what market % Facebook has to really know how locked in they are to their market too. It could be the seed of strategically strong position, but it's just a seed right now.

Openening up is seriously wrong when it removes what makes Facebook different. Strategically, they can't take on MySpace. That's another Napolean into Russia in winter. Also, CPM should be more tied to the desirous demongraphic here. Dilute that and you'll add more advertisers at a lower rate and end up where you started and eventually not able to compete with more entrenched open networks.

What they can do though is figure out how to monetize their community in addition to advertising. That makes buying them now a big risk, but an exciting proposition too. If they crack that nut themselves, they'll justify 20X with more cash flow. If they can figure out what problems their users have, and a better way to solve those problems through their network, they'll transcend cash flow on advertising and increase the value their users see in the service.

I'd sell it if I had it because things that rise this quickly can come down just as fast. Y! also has a interesting network of products and some experience trying to monetize properties in areas outside of advertising.

[Mesattack]

I think this valuation is insane for the following reasons:

1. Advertising does not work at FB. I know this first hand. We saw anemic ctrs of like .17 with a cvr of .25% (though it was MUCH better a year earlier). You cannot make money there which leaves it to the branders.

2. You have to open the site to everyone to really see some bigger #s but this would destroy the community over time.

3. The technology SUCKS. We were not even able to send a message to our users. No defensible technology so you pay for something that can be duplicated in months. Look at SV in Germany...they created a FB clone in weeks.

4. Management hubris.

5. On any dcf model you would need to be incredibly cautious because this is a fragile company with no real assets beyond a community who can depart as quickly as they showed up.

6. MS had much more obviousl ways to monetize the site while FB does not.

Personally, and in my humble opinion, coughing up 1B on them is akin to putting that same amount on black...

www.markseremet.com

[Mr Wave Theory]

Whenever news of a "potential" acquisition is leaked to the press, expect there to be political forces at work that are for or a against the deal. Yahoo! Inc's rumored acquisition of FaceBook, first broken by the Wall Street Journal, seems to be a such a case. Within one earnings disappointment under its point and another one soon to come, I suspect there are 2 opposing factions within the executive leadership of Yahoo! that are sparring over the precise strategy of how to get Yahoo! out of its current rut. Read More

[mark]

look at the date i'm writing this......$1B for FB today, with it's 35M members, tenth most visited site in the US, etc. Most analysts value FB in the $5B to $6B range....

[mezcal1973]

Valued Facebook at $635M. After reading these comments, it looks like I may have been a too generous. Financial model posted on EditGrid.

http://www.editgrid.com/user/mtollefsen/Facebook_Valuation