Facebook: How Will It Justify Its $15 Billion Worth?
| January 8, 2008 | 5:03 pm | Internet & GamingNote: This post was written as a response and commentary to Mazyar’s post on minds1anda.com. Since then his post and opinions have been modified. I will not be re-modifying this article to reflect those changes. I might make another response post, though.
Facebook had a very good 2007. It closed a 240 million dollar equity deal to boost its value to $15 Billion, it had perhaps the greatest innovation of the year with Facebook applications (more on that in a bit), and it even nearly became the word of the year (w00t? Come on). This hasn’t quieted the critics, however. It came under assault for Beacon, its advertising program that places what you do on outside websites onto news feed (for example, I have one friend who keeps adding recipes to epicurious.com and it keeps showing up on my news feed). It has also been criticized by some experts who believe that Facebook is overvalued. Even Bruce Jaffe, Microsoft’s VP of Corporate Development, said that it “paid a premium” with its investment in Facebook.
Let’s get to the meat of the issue, shall we? Is Facebook worth $15 billion now and what should Facebook do to validate that valuation? My dear friend Mazyar Kazerooni, Mind 1 of minds1anda.com wrote about this very subject in a recent post. For those of you who have not already basked in the glow of his post, here’s a summary of his recommendations:
- They need to loosen their ad policies.
- They need to allow social ads to be placed on third party sites
- They need to build a system for third party sites to collect deep demographic information on their users
- They need to build a system for companies to easily find potential employees
Right now, Facebook earns between $100 million and $250 million, nearly all of it on advertising revenue. They are a private company, so we can only speculate. Peter Thiel, Paypal co-founder, venture capitalist and Facebook’s most prominent investor, stated that Facebook’s internal financial models predict a $1 Billion revenue stream by 2015.
I believe that projection is too low. It has more potential than that by 2015. Perhaps they’re trying to be conservative to shatter expectations. In any case, Mazy’s two recommendations on advertising are, in my opinion, steps in that direction. Facebook has two important pieces in the financial puzzle: information and eyeballs. But they cannot rely on advertising on the Facebook platform alone to act as the revenue stream of the company. And I doubt that it will stay that way for very long.
They need to create a system for placing Facebook social ads on third party companies. Sound familiar? That’s because this is exactly like Google’s Adsense program. Those text ads you see on basically every website on the planet (and on your left)? Yeah, that’s Google’s main revenue stream. But Facebook could do it better than Google. Let me explain. Google’s core strength is its search, specifically contextual search and its pagerank technology. When you place Google ads on a website, it searches the website to see the content. It will go “Oh, this is a music website!” and place on music ads, perhaps like the ringtones you see in the image on the left. Facebook’s core strength is the information communicated by its members all across its platform. That information includes very valuable demographic information: interests, dislikes, and the evolution of these as time passes. If Facebook created a Facebook ads program, it could take Google ads a step farther: the ads would not only know they are on a music website, but that perhaps 30% of visitors with Facebook accounts that visit the website are Metallica fans, and thus the ads could now be displaying Metallica ads and ringtones to directly hit this audience. As Facebook grows as the most accepted platform for internet communication, this data will only become more reliable. Facebook ads have the potential to become far more precise than even Google Adsense advertising. That is a chilling reality that I believe scares the crap out of Google. I am not the only one to suggest this. Michael Arrington of Techcrunch has spoken about this before. Facebook’s social ads program is heading in this direction. So think of Facebook like the human body: Its heart is the Facebook platform, what we all have been using every day to write on walls and poke our crushes. It is the vital blood that circulates throughout the body. Facebook, the company, is the head, led by Mr. Zuckerberg. It is the brain that is directing operations and doing the brainstorming. The rest of the body, though, will become the Facebook ad network. Advertisements are the legs of Facebook right now, what supports the system. The arms could be the 3rd party ads and Facebook applications, with its reach and muscle extending all across the internet.
It could beat that $1 Billion mark, but will be a very bumpy road. There will be privacy criticism, which is why the information used in 3rd party Facebook ads must be general and nonspecific. If you explain the 3rd party ad system to an individual (as I have…a couple dozen times), it makes perfect sense. Do it on the masses, and there’s a panic. I believe that a balance can be found to make this work. They must institute criticism contingency plans so that they can effectively counter criticism (remember the Students Against Facebook News Feed controversy?) And finally, they must expand and prepare for a battle like no other when they finally must go punch-for-punch with the Google machine.
So here is a short list of my recommendations for Facebook. I have plenty more, but they’re for another day.
- Expand the Facebook social ads program to 3rd party websites. This is essentially creating a Facebook competitor to Google Adsense.
- Create criticism contingency and response plans so that they come off as strong when they’re under fire (i.e. Students Against Facebook News Feed and too a lesser extent Beacon). I’m going to bet they have some already.
- Bring in additional business and strategic talent. They’ve already been doing it. As a start-up, they are still small and they need time before they can hire every intelligent person on the planet (i.e. Google). They also have an New York office, if you didn’t know, that does a lot of the non-engineering work.
- Create more applications and products to build business loyalty to Facebook. Facebook Applications, as I stated at the start of this article, are the greatest online innovation of 2007. Facebook is now a medium of information and commerce. Expect an app that will help you pay all your bills in the next two years. But they also need additional business products that make use of their expertise. Once again, they seem to be preparing for this direciton.
- Never forget its mission, to improve how people communicate and interact with each other and to help facilitate the sharing of information. Google seeks to organize the world’s information, but what use is it if it can’t be shared and built upon? Facebook may well become the main platform for interaction on the internet. But companies that forget their core overextend and expand and become slow. Facebook can’t allow that. Its core is social communication, its legs and arms are advertising. It’s not InterActiveCorp and it’s not Google.
Facebook is worth more than $15 Billion, or at least it will be. Valuations are not just about current prospects, but about future potential, and the potential of Facebook is far greater than most people think. Microsoft will not regret its investment into Facebook.
