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Do you think Facebook is really worth $100 billion?

Purple gold bars

Facebook. Worth more than all the gold on the planet.

I saw a great programme on the BBC last night about Facebook which particularly focused on its monetisation schemes and possible valuation of $100 billion. Yep, you read that right. One. Hundred. Billion. Dollars. Is it really worth that much? I’m sceptical.

To be fair, I’m not an economist, an accountant, a mathamagician or even particularly reliable at adding numbers together so I’m not entirely sure I have any credibility whatsoever in my scepticism so let’s just be nice and call it a hunch. Aside from the fact that FB is set to only make $3.2 billion (‘only’ he says) in revenue this year, there seems to be propensity of recent to over-inflate the value of Internet companies. Now, if I was a dirty cynical socialist I would say that this is being done on purpose by over-eager valuation agencies in order for investors to maximise their return but I’m not so I won’t.

The trend of decline

However, there have certainly been some curious goings on lately amongst some of the biggest online companies. Groupon, after much scrutiny, had to drop its initial public offering valuation by almost half and its shares have had a very rocky time since whilst Zynga, the guys behind the (in)famous Farmville et al, has recently reduced its valuation by almost a third. Hmm, I smell a trend.

It’s not that these companies aren’t hugely successful or don’t make any cash, it’s just that there seems to be a reasoning as of late that popularity = value, something that investors leverage to their own benefit. The concept of funneling a huge amount of cash into a business to grow it rapidly and fend off the competition is nothing new. Amazon’s been doing it for years, all with a long term strategy to dominate the marketplace until no one can possibly compete and they can reap the rewards. It seems the peeps at Facebook (and even Twitter for that matter) have the same idea.

every one of [Facebooks] users is a human battery, powering hordes of marketeers and advertisers, and the more we give, the more they get

Except FB doesn’t sell products, it provides a socialising service, one that is very integral to a lot of people’s lives and even occasionally steps on the toes of privacy. We’re trusting a company, a for-profit company, with a huge amount of personal information about ourselves which, in theory, probably isn’t the best of ideas but in practice is fine so long as they treat our info with respect and privacy.

And that’s the problem.

Human batteries

The $100 billion valuation of Facebook is driven by the fact that it’s a marketing gold mine, a platform with 750 million people willing spilling every tiny morsal of personal information about themselves out onto it, and the key to unlocking huge wads of cash from FB is in exploiting that information. They’ve already introduced sponsored stories, essentially unknowing ad endorsements by you, and are feeding an entire microcosm of specialised advertising companies. It’s almost as if every one of their users is a human battery, powering hordes of marketeers and advertisers, and the more we give, the more they get.

So, just like Groupon and Zynga, Facebook is counting on the fact that there is a huge amount of perceived value in their company even if, in comparison, the actual real generated value is very small. Unlocking that value though will be a tricky tightrope to walk as they will need balance the creation of marketing and advertising revenue based upon its users without pissing those users off. Personally, I don’t think that’s possible. As soon as FB tries to aggressively generate revenue, people are going to start getting annoyed and head somewhere else. Like Google+.

And that’s the conundrum Facebook is dealing with. Whilst it might be able to claim huge potential, unlocking it will be no easy feat, especially to the amount that warrants a $100 billion valuation. Right now, they’re counting on faith and hype to push their valuation up, cashing in on the notion, right or wrong, that popularity carries innate value. So yes, FB might be able to value itself at $100 billion and raise $10 billion in its IPO right now but I can’t help but feel someone is going to get burned further down the line as the current investors take their cash and run, leaving future investors to suffer from declining share value just as we’re seeing with Groupon and Pandora.

Boom, bust, who cares, right?

In a way this kind of odd boom and bust cycle isn’t entirely dissimilar to the whole Dot Com fiasco of the late ’90s. Spend a lot, work your employees to the bone, amass a following and then float your company for some ridiculous unjustified valuation all in the name of making a dent in the universe. Personally, I prefer the slow build of bootstrap businesses.

Anyway, my thoughts. What about you? Do you think Facebook is really worth $100 billion?

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Author: Gordon McLachlan

Gordon is uncomfortably good looking.

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  1. Ewan December 7, 2011 at 2:57 pm

    Definitely read similar thoughts on this subject. It essentially reduces down to a ponzi scheme. These companies have had so many rounds of investment, and every round has sought to repay the previous investors, that when the IPO comes, the public will be left holding a ticking time-bomb.

    Less convinced that folk will turn to G+ as a substitute any time soon, mind. But that is an argument for another time

    • Gordon December 8, 2011 at 1:00 pm

      Well said – I couldn’t agree more. I don’t think anyone’s really thinking long term about Facebook’s value, at least not past going for a massive IPO and reaping huge, short-term returns.

  2. amcl December 8, 2011 at 11:52 am

    >> DO YOU THINK FACEBOOK IS REALLY WORTH $100 BILLION?

    s/FACEBOOK/Primate/g

  3. [...] funny that in a world of $100 billion IPOs, billion dollar buyouts, and staggering online success, we still have trouble appreciating the [...]

  4. Jason Occhipinti June 8, 2012 at 3:33 am

    Not very sure of the 100 billion dollar valuation. I have heard that their click + conversion rates are anemic compared to other ad options – An idea that GM has come to grips with – http://www.forbes.com/sites/joannmuller/2012/05/15/gm-says-facebook-ads-dont-work-pulls-10-million-account/

    For now, Facebook still seems to be the popular with businesses. I have encountered people talking about Facebook as the cornerstone their “social media advertising strategy”…but when you ask people ‘why?’ they fail to come up with any logical reason, other than “it’s Facebook, everybody is on it!” It seems a bit irrational…esp. if the rates are as low as they say…

    http://www.itworld.com/internet/135422/study-facebook-ad-click-through-rates-surprisingly-low

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