Back on December 17th, I wrote that Facebook’s founder Mark Zuckerberg getting tagged as Time’s Man of the Year meant the top was likely in for Facebook valuation at $58.75 billion dollars (Uh-Oh: Facebook’s Zuckerberg is Time Man of the Year).

This meme has slowly propagated, and quite a few other analysts have looked at the same; See Douglas Rushkoff and the Reformed Broker, amongst others. Goldman Sachs does not agree with this assessment, as they just poured $500 million into FB at a $50 billion dollar valuation, with an option for another $1.5 billion right behind it.

If and when Facebook goes public, they must monetize their user base — I find it hard to see how they do that without annoying their base of users away. Mine is a decidedly non-consensus viewpoint.

The free web app has to figure out a way to have the site generate revenue and profits from its immense user base. Currently, they generate about $ 1 billion dollars in revenues at about a 25% margin.

The challenge for FB is that as a free site, there is a dynamic tension between the users and the people who seek to monetize those users. The 15-25 year old demographic is well represented on Facebook, and while advertisers want to reach them, they don’t have all that much discretionary income.

But most intriguing for potential FB investors are the Facebook numbers:

How accurate are they?  Facebook claims more than 500 million users, each one of whom can have as many as 5,000 friends. Yet as a privately held company, there are no real disclosure obligations as to this data. Their announcements have little legal impact; they can pretty much say WTF they want and there are no consequences. Publicly traded companies do not have that freedom.

Any investors into a Facebook Private or an IPO may want to get the answers to the following questions:

1. FB claims 500 million subscribers. How many of these are active users — at least once or twice per week? How many of these are dead accounts, with no activity for 30 days? 90 days or more?

2. What is the average revenue per subscriber? How are you planning to grow this?

3. How much churn does Facebook go through? For every 100 new subscribers, how many subscribers leave?

4. What is the life cycle of the typical Facebook subscriber? How active are they for how long, what sort of arc do they cut across theirFB life cycle?

5. Besides advertising, how will you monetize your user base? Are you selling their data to buyers? What about anonymized data — are you selling this also?

Bonus question: What is the subscriber growth like outside of the US? Where are your fastest growing areas? What area is not seeing big penetration ?

Investors have to consider if the Facebook business model has staying power, or if it will eventually morph into the next MySpace or Yahoo  . . .


Uh-Oh: Facebook’s Zuckerberg is Time Man of the Year (December 17th, 2010)

Magazine Cover Indicators

See also:
Facebook hype will fade
Douglas Rushkoff
CNN January 7, 2011

Category: Valuation, Venture Capital

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

61 Responses to “5 Questions for Facebook Investors”

  1. Their core user base is going to be key. I assume that is in the 10% – 20% range and then their periphery of family members and friends would run up higher. I would also think that this is as much about the tracking/shaping of user habits and branding as it is about revenue up front.

    I can imagine how many companies would pay good money to figure out where the ‘cow’ goes on its own without having to build fences to direct it. These are young ‘cows’ and future grazers. Getting that mindset and how it thinks early could mean a generation of profit for many companies.

    And in case anyone is wondering, I’m not calling FB users cows. I’m using the metaphor to look at it from the corporation’s perspective. For we are all ‘cows’ to be ‘milked’ at some point to someone

    50 times revenue it a bit steep. That is what Nortel was like at its peak. I remember making the mistake of betting against google when it came out so I’ll not have a dog in this fight

  2. ndmaster says:

    Couldn’t a similar argument be made against Google, pre-IPO? No one thought the advertising model could grow as much as it has. Also, users will probably never pay a dime to FB, just like users don’t pay GOOG, so they won’t care if they are ‘monetized’.

  3. BusSchDean says:

    Q#7: What is the likelihood that competing platforms will drain off FB users by segmenting them according the social context/applications used most or their passions?
    e.g., If sharing videos and pictures with far flung family members represents 80% of a users FB
    time and some aspects of FB are irritating — who cares about the girl you met once under the
    bleachers at the football game — why not move to a site focused on connecting families?
    e.g., If a group of FB users share a passion for a sport or hobby why be on FB if a site targeting
    that passion evolves with the necessary social aspects?

    The history of evolving products and services is a history of segmentation of both supply
    and demand. How much harder is it to add value appreciated by 500M worldwide users
    relative to adding value appreciated by 12M more passionate worldwide users?

    Q#8: As FB offers more features, and this will happen, to what extent will future partnerships dilute the current perceived future value of FB?

    Remember the ten years of no profits at Amazon?

  4. cognos says:

    Uh, Facebook already has 2x the revenue of pre-IPO Google.

    Yet, BR thinks they cannot monetize… wierd? Do you understand they have over 600 mln worldwide users? Didnt it recently surpass Google as the world’s most visited site?

    So yeah, if they are worth $50B and Google is worth $200B then they are “monetizing” at some fraction of the rate (1/4th to 1/10th)… but that is still worth something.

    And they are growing much, much faster. Unless that stops, Facebook looks set to be the next $100B company.

  5. carleric says:

    I too am an idiot…I couldn’t figure out all the excitement over a search engine (Google) and still can’t but I was wrong, wrong, wrong. I just dont get the business model for Facebook….would I pay any price for a site that relies on advertising for its revenue? Apparently I will be wrong but I too have no dog in this fight…

  6. destor23 says:

    I’m an active Facebook user. I used to go through dryspells but now so many of my far off friends and acquaintances are active that I certainly get lured to click through, usually multiple times a day. That said, I’ve never spent a penny on it and I’ve never bought a service through one of its advertisements. At best I may have accidentally clicked through some of its ads. The other thing is I’ve blocked all those Zynga applications and that seems to be where money is being made. One would find themselves rather ridiculed in my circle of friends were they caught playing that drek — a sentiment that seems to be growing.

    I see Google arguments up above that are pretty compelling but Google has been able to monetize its user base without huge compromising their privacy. WilLF acebook be able to pull that off?

  7. John Reeder says:

    I think Facebook has done such a good job of capturing older users (users with discretionary income), that they are actually starting to run off the younger users. No 18 year old wants to be friends with their mom.

    But I think the argument against Facebook’s valuation essentially boils down to the fact that the absolute success that they have had capturing users has not been met with a similar amount of success growing revenues.

    I wrote about this on my site the other day. Links is here, cliffs notes version below.

    I’ve heard Facebook had $2 million in 2010 revenues. If they earned about 1/3 of that amount, which is what Google was doing earlier in their growth curve, then Facebook’s valuation is something like 70X earnings. They might grow into a lower multiple, but there are other public tech companies out there that are also growing, that are trading at 20-25X earnings.

    To buy into the Facebook valuation you have to both believe in the brilliance of the Facebook team, and also assume that they haven’t directed that brilliance at revenue thus far. I find that to be a difficult proposition to believe in. What does Facebook do when it has no more users to grow, and no more features of other web services to copy? How does that result in revenue growth on the level that the 70X earnings valuation requires?

  8. Terry says:

    I have grown to believe over the years that a key reason a company goes public–FB, hedge funds, whatever–is that it sees itself as having lost its “alpha”–it’s ability to make extraordinary returns. That’s not always the case–see GOOG–but I always question the motivation of companies moving from private to public.

  9. machinehead says:

    $59 billion valuation on $1 billion in revenue is a price/sales ratio of 59.

    It don’t matter how they monetize those kids, it’s still a dotcom-era valuation and it ends the same way — in tears.

  10. Super-Anon says:

    We all know this stuff is overvalued… like always it’s simply a matter of how long it goes on.

  11. Walker says:

    The real money is in Facebook applications (e.g. social games). Facebook is the “hardware”, while social gaming companies like Zynga are the “software”.

    The social applications have a well understood business model based upon microtransactions. The free-to-play, pay-for-stuff model was pioneered in Asia and has revolutionized games in this country. Heck, if you go to an computer games conference these days, over half of the talks will be about monetization models. Zynga is awash in cash and it is only going to get bigger. I have seen their recruitment materials; the company looks like Google pre-IPO.

    Facebook makes a lot off of this market. However, I know that Zynga feels like Facebook is holding them back and they are looking to break out of this symbiotic relationship. If a lot of application companies do this, then this will have a profound affect on Facebook’s revenue model.

  12. I was a beta tester of Google search way back when, and it was so much better than anything else that there was.

    The brain trust, the engineering expertise, the ability to create new apps (Google Earth, Docs, Maps, Books, Translate, etc.) was readily apparent.

    I see Facebook as more of a 1 trick pony — they captured a particular aspect of social networking brilliantly — but what else they could do and how long that core business lasts is anyone’s guess.

  13. Bill W says:

    “If and when Facebook goes public, they must monetize their user base — I find it hard to see how they do that without annoying their base of users away. Mine is a decidedly non-consensus viewpoint.”

    That’s a great point. Facebook already has problems with privacy concerns, and I think that will only get worst as people become more and more conscience of controlling their online image. In my opinion, more privacy will hurt Facebook’s ability to monitize it’s user base.

    I could see Facebook’s market share eaten away by a competitor that lets you keep ownership and control of your personal information. Maybe you could download software to your home PC or smart phone. Then use that software to create your own server that would be connected to everyone else on this social network. That way, you would never lose control over your data. You might also do the same thing with a cloud account. Probably a bad idea, but I’m in the mood to pontificate, as I’ve taken the day off.

    Either way, I’m not on Facebook. I prefer to make anonymous, snarky comments on message boards.

  14. Walker says:

    “I see Facebook as more of a 1 trick pony — they captured a particular aspect of social networking brilliantly — but what else they could do and how long that core business lasts is anyone’s guess.”

    That is because Facebook is a platform developer and not an application developer. Their business model is like what Sun had. Sun made machines and OSs, and made some money off of selling those. But what really drove their sales was an outside company like Oracle. And we all saw what happened with Sun.

    The question is, will Facebook be like Sun or like Apple? Will they rely completely on other companies to define their application eco-system for them, or will they design it themselves.

  15. destor23 says:

    @Barry Ritholtz: That’s really interesting. Google was just plain better. You didn’t have to be a techie to notice it, either. Facebook’s allure, once your in, is that it’s hard to get out without kind of shunning a bunch of people you don’t want to shun. All of the sudden you have to check it because people are contacting you on it, inviting you to things, etc. That never happened with Friendster and Myspace was always closer to a network of personal web pages but… I dunno, can they hold this together based on guilt and loose social ties?

  16. TheUnrepentantGunner says:

    Barry: I have a valuation less than the 50 billion figure trotted out, but more than what i think you have it at by a healthy margin.

    Here are some things you’ve possibly overlooked:

    1) You’ve sort of got the “they could screw up like MySpace and anger their users”. Right now though they dont need to. They havent made any major mistakes but are profitable. More importantly there is a critical mass issue. The fastest growing set of FB users right now is the older crowd. My 60 something parents signed up my 80 something grandmom as an example, and she knows about enough to say hi to people. If you are 50 and only 3 of your freinds have it you can dismiss them as being a too-early adapter. but if you have 20 friends who are on it, and you got laid off and you heard your buddy used it to help him find a job, maybe you sign up.

    Once they are big enough (myspace and friendster never were), then youre a new user, you only have one real site to sign up for.

    2) they are profitable right now. This means they can be much less invasive about how they monetize the base. They have tried to make inroads into classifieds. So far i think the response is muted, but would you rather buy furniture or a used car via craigslist where you literally dont know who you’re meeting, or would you rather have a face and a name, and possibly some sort of mutual friend that you didnt realize. They can play around the fringes without being really aggressive like myspace was.

    3) they have made mistakes with privacy, but have also gotten enough big decisions right that you sort of have to trust they will keep making big ones right.

    4) Their business isn’t that capital intensive. The advertising is somewhat cyclical, but its a relatively clean cash-flow, and even if they dont increase monetization per user at all, just growing the userbase will give them probably 2-3 billion of revenue if they just play it safe over 3-4 years, get more users in Australia, and maybe take a chance at india too. That in and of itself is a 11 figure valuation.

    5) Their advertising sometimes misses the target, but is mostly frighteningly on target. Their datamine is gold. The last time i bought a product because of an ad, it was facebook, (how did they figure out i liked rum? was it because my idiot 20-something friends were posting about their adventures with captain? was it me posting on my tour of the appleton factory?) either way, i think they have a huge advantage in that google can show what YOU like, but facebook has what you like AND what your friends like / are doing.

    6) I compare facebook in that sense to MTV of the late 80s. Their raw viewership wasnt *that* high, but if you wanted to finely target your audience, MTV could give you a very focused userbase, which allowed them to charge premiums versus other cable channels of similar viewing. (now MTV is mostly irrelevant isnt it, anyone?)

    7) The dropoff rate is lower than people think. It’s tempting to drop off, and i dont use it a ton, but it’s also cool to have a rolodex of 500 or so people that have their phone # and emails. People change phone #’s yearly in some cases, so having easy access to the contact information for so many people i might need to conceivably reach out to (whether its a contact at a museum, someone who i want to pick their brain, etc), is a huge advantage. I would also add that it is sort of an easy judge of character for me. If someone is updating 20 times a day and has gone off the proverbial reservation, i can sort of write them off in life too to a lesser extent and not make as much of an effort to stay in touch. If i have a freind that i never talk politics with but is somehow far left or right which i didnt know, i can be more aware next time i have lunch with them.

    With that said, i dont think its 50 billion, but if you told me 20-35, id say that it’s plausible…

  17. @machinehead Says:January 12th, 2011 at 11:52 am

    $59 billion valuation on $1 billion in revenue is a price/sales ratio of 59.

    It don’t matter how they monetize those kids, it’s still a dotcom-era valuation and it ends the same way — in tears.


    I’d say the same thing. The only caveat I’d put on that is that Goldman has jumped on board. It is always cautionary to bet against them (maybe they are just going for the ‘sell to the next sucker’, short term trade when the bidding frenzy takes off). They may have seen something that the rest of us aren’t privy to. They may not be the smartest people in the room but they are definitely the best connected, so I’d be careful.

  18. VennData says:

    If the Faginesque Rupert Murdock can’t pick the “Social Network” pocket, no one can…

    Myspace Cuts Half of Staff In Effort to Stanch Losses

    It will be the worst of times for Facebook’s hopeful investors when they realize the web won’t adjust to the Facebook monetization models. Do you want one TV channel selling you ads?

    Facebook is closed (aka BR’s “one-trick pony”) Google is open. That’s all you need to know. Google will drive out any long term strategy to privatize the web. Net neutrality – on the margin – will be the law of the land, because that’s what the people want.

  19. donna says:

    Wait — FB and Google have advertisements? Huh. I use Firefox, NoScript and AdBlockerPlus, and never see an ad. Haven’t for years.

    Guess some people don’t know how to use the Internets properly.

    I don’t play any of the silly FB games, either, and there’s no personal info on my FB account. So I don’t think they are making much off me.

    And I’m friends with not only my kids, but their friends as well. Guess I’m the cool mom.

    But my current love is tumblr, and I’m having way more fun with it. If you want to invest in something, I would go there. And there’s lots of new stuff on the horizon — follow A VC or Feld thoughts, or read The Next Web.

    FB is going to do just fine, but probably not as well as the later investors think. Isn’t that kind of how it always works?

  20. Greg0658 says:

    #1-B – I have one account for me & business – but I know 3 acquaintances with more than one – a city blog, another a re-election campaign, another for a business only

    the payback* for the background infrastructure – I’ll keep my mouth shut – loose lips sink ships – even tho I think people need to get airraid warnings

    I like FB and want it to survive (some tweeks in infrastructure would be nice)

    *coda – 1 being why buy all this computer wifi/servers junk if there is nothing worthwhile to go after

  21. Greg0658 says:

    oh ya – I slighted another acquaintance x2 – a band and/or gig concert

  22. Joe Retail says:

    Use Facebook moderately, and also had (have) a “dummy” account that I used mainly to see the impact of changes on my security settings. When I tried to get rid of that account I discovered the answer to your question #3 – how many subscribers leave?

    “You can check out any time you want, but you can’t ever leave.”

  23. Super-Anon says:

    Speaking of magazine cover indicators, the Economists “Bubble Warning” magazine cover is just over a year old now:

    I remember seeing it and thinking “Sh*t, that probably means we have at least two years to go.”

  24. Kort says:

    FB is closed, but the value in there is keeping your photos and other info shared to a group of people, and not the entire internet.

    You mentioned ‘the next Yahoo’ and exactly—yahoo was open, but it was just a portal and a search engine. A better search engine appeared, called Google and there went Yahoo. The effort to switch from typing to is nothing. To install a New Toolbar(!) is nothing. Migrating your friends and photos to another site? Not going to happen.

    People don’t need or want 5,000,000 results on a search. Facebook has the potential—and we’ll know more in 2-3 years—of customizing search based upon what people in your network are searching/buying, their opinions, etc.

  25. Tarkus says:

    Facebook might just the next MySpace. They want to expand into China, but China has its own social networking sites already. Plus, is they ever did, you know that they handed the Chinese gov’t the full security keys so they can crack down on dissidents. That’s not a product many people will want to use. As someone else pointed out, FB already has privacy issues, and just because they say they are fixed doesn’t make it so.

    Users can sign up multiple times also, so I’m not so sure that “user base” numbers aren’t as badly inflated and overstated as…I don’t know…IPO hype.

  26. Johnny99 says:

    May Goldman experience the same joy with Facebook that News Corp experienced with MySpace.

    Couldn’t happen to a nicer bunch of douchebags.

  27. jdjed says:

    Facebook is a flash in the pan. Back in the day, the major web portals bragged about their “eyeballs” during IPO road shows. The dirty secret was that all that traffic was farting around on web page building pages which did not generate profitable revenues. Facebook is no different.

  28. dasht says:

    Mr. Ritholtz [Call me BR], I think your analysis should consider another two ways in which FB can lose:

    1) People can get bored with it and not even 10 more Zynga games can get them back. This can’t be predicted or inferred from aggregated churn numbers, necessarily. For this, I think you need to look at churn numbers in relation to the social graph. The graph contains cliques of friends, often folks who joined at roughly the same time. Most of most people’s interactions stay within a small number of cliques. Are there any patterns that suggest cliques quit roughly as a group? Does quitting spread from clique to clique? (It seems likely cliques might quit as a group. A few drop off and the “network effect” of the system is quadratically reduced for those who stay. If that’s the case, you would also think that “clique death” might be contagious between linked cliques. If those patterns are found, that suggests the non-trivial possibility of an abrupt, fast-spreading epidemic of attrition at some point.)

    2) External services can provide superior substitutes to the functionality that people really like about FB. Frankly, the FB software doesn’t really provide that much of an advance over the kind of mailing list and newsgroup software we’ve had for years. I don’t know if any of the current efforts to build a replacement (e.g. Diaspora) will actually win but technologically, it is hard to believe that a winning replacement won’t come along eventually.

    I’m skeptical that there will be a lastingly large number of users to monetize, nevermind asking how they can be monetized.

  29. Facebook is a fad. My teenage kids use it, but even they are beginning to get annoyed with it. Once some of the cool people point the herd of teenagers elsewhere, Facebook goes the way of MySpace. I abhore the idea of trying to be a “cool” dad by friending my kids on Facebook, so I’ve never used it. My wife, who can never seem to get enough intimate details of the kid’s lives, uses it.

    Google won market share in search because it was good. Search is a “gatekeeper” function, and gatekeepers always, like the troll under the bridge, can collect outsized fees for allowing traffic to flow. But Google is not a natural monopoly, such as inheres with communications platforms. Microsoft’s windows, which is a communications platform, is a natural monopoly, or was for a good while. Which is part of why Microsoft’s entry into search presents such a threat to Google’s search cow. But a little competition will hurt neither company, nor their customers.

  30. [...] Five questions for Facebook investors.  (Big Picture) [...]

  31. Bob A says:

    I am looking forward to the day when facebook is just another memory like b&w tv and aol…
    it can’t happen soon enough

  32. Bill W says:

    BusSchDean Says:
    Q#7: What is the likelihood that competing platforms will drain off FB users by segmenting them according the social context/applications used most or their passions?

    That’s a good point. I think there’s a business opportunity for some talented programmers to come up with a universal “social networking interface” that would be open sourced. Developers could design unique social networks that could be connected to other social networks. That way, people on the social network for gardeners can still be connected to the social network for auto mechanics without having to join more than one social network. Or the social network for people very concerned with their privacy can be connected to the social network for nudists who don’t give a hoot about privacy. It’s the type of thing that could possibly be sold to Google.

  33. ewmayer says:

    Institutional Risk Analytics co-founder Chris Whalen comments on the dubious $50 billion “valuation” of still-private Facebook implied by a recent Goldman Sachs investment in the firm:

    The hype about FB reminds me of a ginormous version of the brouhaha around Skype when it was still a privately-held company: Large, fast-growing user base, “this could be the next big thing”, etc. But the very things about the business which allow the portal to quickly attract a huge user base (in Skype`s case, free or nearly-free long-distance telephony and chat) make it hard to monetize. With Skype, eBay found that out the hard way.

  34. DL says:

    I think that by now it has dawned on a lot of people that there’s not much privacy on FB. That realization would seem to be a hindrance to “monetization” of the eyeballs.

  35. CentralIowaFarmer says:

    What’s that smell?

    Smells like AOL-TimeWarner…

  36. tax_me_more says:

    “Do you understand they have over 600 mln worldwide users? Didnt it recently surpass Google as the world’s most visited site?”

    I think it was more subtle than that. It surpassed google siteS for most time spent not hits. And really that means it passed Google owned YouTube for time wasted by teens. YouTube like FB is barely profitable. Google makes its money on with placement ads on the right side of the search results or top now and adsense ads with the familiar “ads by google” tag.

  37. Greg0658 says:

    from what I’ve read online – GS is no magazine – and dialup was doomed by audiovisual gottahaves – and you’s don’t see inflation – it didn’t cost me 1 red cent

  38. Johnny99 says:

    “If and when Facebook goes public, they must monetize their user base — I find it hard to see how they do that without annoying their base of users away.”

    That’s actually a good point. I’ve always admired Google for their restraint in that area. The user experience rarely suffers just so Google can make an extra buck. For me, it’s still the fastest, easiest place to find stuff online.

    They don’t do everything right, but Google seems to know that one of the ways to retain users is to respect the things that brought people to Google in the first place.

  39. Greg0658 says:

    Buggles – video killed the radio star live 2004

  40. [...] 5 Questions for Facebook Investors As a privately held company, Facebook has no significant disclosure obligations. So, Barry Ritholtz says, there are five questions that any investor in a Facebook private share sale – or in an initial public offering – should want to get answered first. The Big Picture [...]

  41. Livermore Shimervore says:

    Please wake me when I can start shorting FB….

    1-what is proprieatary about FB?

    2- Why will Facebook escape the fate of MySpace, Yahoo and Navigator, all darlings that were quickly eclipsed by something new?

    3-If FB allowed its users to see who was visiting their profile, when and how many times… long before the website collapsed from lack of use? what does that say about the real purpose of FB?

    4-Who is more grotesquesly over-valued from a ‘sustainability’: FB or Groupon?

    5A-What why do people tweet about their epic dump after going to Chipotle?
    5B- Why do people read about other people’s epics dumps?’

    6-Why isn’t Golden Slacks getting called out for pushing additional shares on a FB valuation that needs it to go up to $60 billion before anyone makes any money.

    7-How in the world can 1 in 12 people on planet Earth have nothing better to do than spy on their friends via FB?

    8-Is FB and Twitter a secret ploy by China to get us to lower productivity below the Mendoza line so that we fall into the ‘also ran’ category of economic powers?

    9-Why doesn’t Kindle allow other devices to share ‘text to speech’ for their materials…you know so as long as you buy a Kindle.

    10-Why aren’t more people talking about The Black Swan and what a insanely insane movie this is?

  42. Greg0658 says:

    LiverShiv – actually on #3 – the non-personal type FBpage has more metrics – I saw at a demo – but don’t have that type so I can’t go into personal experience depth … other stuff LOL

  43. Greg0658 says:

    ps – haven’t gone to new style page highlighted on 60Min .. someday I’ll put that on my front burner

  44. Greg0658 says:

    pss – maybe #3metrics is an add-on APP (did I disclose I’m not brilliant on all subjects)

  45. RC says:

    Are people serious in comparing Google to Facebook? Really?
    A company who revolutionized search and created OS for the future of computing v/s A company who’s got a photo sharing website and a few games?
    - I think FB feels like the new Geocities … remember Geocities ??? Whenever I hear an ad where a company X says go to, reminds me of my geocities webpage.

    Well, but I am completely in favor of this ever increasing valuations …. I need the bubble to inflate again. Hurray for bubbles !!!

  46. RC says:

    Speaking of bubbles … Another great one is “cloud” … most people have no idea what it means and thats why is selling at 12 times sales.
    Anywhere you go above 10x sales remember year 2000 !!!

    but again, more “cloud” please !!!

  47. alanw says:

    To echo what RC said, Facebook has a dominant user base, but so did AOL at one time. Where’s the ongoing value to the user as it gets spammed up and your data gets sold and your friends depart for someplace more exclusive?

    Google may be doing many of the same things, data-wise, but with innovations like Earth and Android and Streetview and Goggles and Voice, I’d argue that users see an ongoing return on their (personal data) investment in Google that no one else is even trying to match. If I keep getting cool toys for free, I’m very likely to stick around.

  48. You ask the right questions! While Facebook may seem appealing to investors chasing bubbles and magazine covers…

    Thoughts re Facebook and the future of peer-to-peer:

    Certain ‘inventions’ will inevitably arise given the development of the landscape that makes them possible. They are emergent properties of the new landscape.

    The casual peer-to-peer networking offered by Facebook is one such form.

    Like with search before once a certain tipover point is reached concentration becomes self-reinforcing. Alta-vista may have been first in that field… but Google got the prize.

    So it is with Facebook post MySpace. A tipover point may have been reached. But I wouldn’t count on it.

    Its future may be aborted after achieving wide penetration but only marginal utility. There is nothing other than inertia (“But all my friends are here!) and a few games I understand are popular with some… to keep their numbers up.

    Because while Facebook is currently dominant, it doesn’t address the requirements for deep peer-to-peer association. It doesn’t understand its roots in proximity and capability… in other words it doesn’t really help people DO anything much with others.

    And tragically, sometimes missed potentials of new technologies are not regained.

    Example from the past: Television! Which because of cultural inertia adheres to patterns laid down by the first players. Those patterns become extremely difficult to dislodge. The INERTIA of the implementation becomes impossible to shake even when obviously faulty.

    [For my 61 years people have been pointing out (and its scarcely disputable) that the public airwaves could make campaigning a lot cheaper and candidacy available to more than just 'pre-approved' candidates. Yet media costs and the money quest continues to be a thorn in the side of honest politics and good governance... And while I'm a real supporter of enterprise, what effect has a 24/7 TV emphasis on Brands (myth-building) and lowest-common-denominator marketing (lizard-brain appeals) had on the culture? I wonder who's interest THAT serves?]

    Facebook and other such sites are trying to bridge a longstanding gap as ICT quickly goes global. In evolutionary terms its essentially instantaneous:

    There is a FUNDAMENTAL SCALING ISSUE IN HUMAN SOCIETIES associated with NATURAL HUMAN COMMUNITY SIZE (Dunbar’s Number), THE ALTRUISM PROBLEM* (there’s a problematic discontinuity between biological and intellectual altruism) AND COGNITIVE LIMITS (the attention economy).

    In short… our personal networks are smaller than the social organism of which we are a part.

    This presents potentially fatal problems in large group decision making. (But its out of this realization that pragmatic approaches to solution can be found.)

    Social Networks & The Social Organism: Healing the Breach

  49. Jim C says:

    Goldman doesn’t need the value of their investment to go up. You gotta know they will make bank on the IPO. Additionally, the press alone for having the Facebook IPO will be worth a considerable amount in additional IPOs.

  50. CitizenWhy says:

    I am retired, and keep a Facebook account with no/false data, including a phony name. Why? Occasionally it is useful, and the phony name prevents the many retirees and adults whom I know from bombarding me with nonsense. As far as they know, I do not have a Facebook account.

    My point? You missed the fact that the biggest group growing on Facebook are parents and grandparents. With much discretionary income.

    A large part of Facebook value is supposed to be the database of users. Hence the recurring privacy issues, with privacy rules interfering with the marketability of the database. Which is why I enter only phony data. I do not want to be monetized.

    Google has evolved into a lot more than a search engine. Its other lines of business are monetized and growing. Its decision to open a large office in NYC is based on the current and future growth of these other lines of business.

  51. CitizenWhy says:

    Jim C has it right on Goldman Sachs. They do not care if Facebook’s value might be overblown or illusionary. They are only interested in driving up the book value (based on “what the market will bear”) so they can maximize profit when the IPO deal is struck. After that, they couldn’t care less if Facebook tanks. And the traditional strategy for driving up book value is PR and media hype, at which they are very good and their PR firm is very good.

    Please remember that Goldman Sachs is a sales driven culture. The long term, or lasting value, does not matter. Get the sale and sell at maximum price. That’s it. hooah!

  52. For starters can we not call facebook “free” because it really isn’t, rather it is a barter in which they provide the service and you provide them a stream of personal information which they can sell in the form of targeted advertising. If I asked you for all of your personal information so that I could sell it to advertisers, you would either refuse or want to be paid for the info. Its only “free” if your privacy is worthless.

    On the point of advertising the comparison to google is off, people go to goggle looking to quickly bounce somewhere else. Not facebook, there people look to see what people they know are up to. They might bounce off too a cat video that a friend likes but not a cat video that is a random ad.

    Having said that there are a lot of smart (ex-google) there and I’m sure they will make some money some how.

  53. Scimitar says:

    I think an important issue here is that the longer it stays in the space, the more entrenched it becomes since it acts as a communication tool with thepath of least resistance. For example, people comment on each other’s pics, and in the same thread, make plans for the next weekend or whatever. This convenience is not to be sniffed at.

    On the point of monetizing it’s user base – I don’t think it needs to monetize 100% of it at all, just enough to keep them profitable (and they already seem to have done that). Again, for example, they will never see any revenue from a user like me – I don’t click on their ads, I don’t use games, I don’t pay for anything. But I am on it, and I’m not about to leave. As long as the economics of there being enough people in an aggregate network subsidizing the others, they will generate profit. It will work the same way as google did (and no one is claiming google is going under). It becomes sustainable, once it survives.

  54. tetron says:

    Bill W:
    There is an open-source, federated social network software called “Diaspora” under development

    I haven’t used it (and I don’t use Facebook either) so I can’t comment as to whether it is ready for prime time. Also the project got a lot of press before having produced an actual working product which is often the kiss of death for new software, nevertheless I am hopeful that it will at least carve out a niche.

    The usual lifecycle for .com type companies is that they reach “peak hype” and it is after that you find out if the business model was sustainable or just being propped up by investors. FB has had a big runup of hype this year, and as you can see with stories about 80 year old grandmothers joining FB they have likely reached the saturation point where most everyone that was going to get a FB page already has one. Possibly they can find growth internationally, but will have vigorous competition in other countries that already have their own established social network sites (for example, from what I hear, Orkut from Google was a flop in the US but is huge in Brazil). If the past is any guide, FB will fade into the background and in a 2-3 years a new big thing will getting all the press and attention as the “potential facebook-killer”.


  55. phb says:

    Facebook is facing the beginning of the end. From a long line of communication aids beginning with short wave radio in the 50′s to CB radios in the 70′s to “car phones” of the 80′s to AOL in the 90′s and email of the previous decade. All lost prominence as creative destruction marched forward. What’s next to end, Twitter? Better yet, what’s next?

  56. Michael M Thomas says:

    One odd aspect of FB that investors might consider. Many users seem to dislike/resent/hate it with the same strength of feeling they normally reserve for, say, the DMV or their health insurer – and yet it is entirely optional!

  57. Greg0658 says:

    “can we not call facebook free because it really isn’t” – yepper – and I’ve been raggin on who’s got that info out there – Mark steppin on some toes is he ? – time to find a new line of work – best wishes

    “don’t think it needs to monetize 100% of it at all, just enough” – I think (hope) the younger generation is not in all out greed world – is a comfortable living good enough again?

  58. [...] Barry Ritholtz: Five Questions for Facebook.  (TBP) [...]

  59. CitizenWhy says:

    Goldman Sachs will make a lot of money on Facebook. So will certain favored clients. If Facebook tanks, Goldman and its favored clients will have sold at top price. So Goldman does not care about the true value, or the long term value, of Facebook.

  60. [...] 5 Questions for Facebook Investors (TBP) Tweet [...]