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As for Facebook, their headcount and server expense are out of control compared to their revenue growth of 70%. They have NOT figured out how to turn their page views into money. It's taking too long. I am part of the market and have a very sizable investment portfolio and I would not but their stock unless it was at a sharp discount to the real valuation, whatever that is.
For those of us that have been in this wonderful industry since the beginning we must be able to separate the hype from the reality. Facebook is an amazing growth story. Their traffic numbers are almost hard to believe because they are so good. But, their business model is not so good. That is a fact. Despite what Mark Andreesen says they do not possess the ability to turn their traffic into money. This is why their entire senior team has turned over so many times over the past few years, all without making a dime. They know the truth.
I'm quite confident in what I reported on this one -- but of course, private company valuations can be renegotiated and who knows what's happening inside of Facebook right now.
Imho, regarding IPO, they'll need to prove that their experimental ads are working. That seems to be happening although probably still early stages. I would be surprised to see an IPO this year (but yeah... who knows what's happening inside of Facebook right now).
Anybody can sell or buy anything at any time in today's marketplace --- witness Craigslist --- simple, anonymous, caveat emptor --- but a real marketplace nonetheless. People can always "get shares to market" but that is not the same, even remotely, as being a public company.
I run a little public company and am intimately familiar (not nearly as much as I should be, I am sure) w/ the regulatory implications of the 1933/34 Acts, Reg FD, SOx, market regs and corporate governance requirements. Not a huge fan of the public framework but not throwing bombs either.
It is a boatload of "stuff" but in an odd way, it is a primer in how a company should assess its business --- not to the detriment of just good business practices by a competent management, board and shareholders --- but a pretty good framework in which to run and evaluate a business. The disciplines required are "good" disciplines for serious business folks. The requirements to issue a "reviewed" 10Q, an "audited" 10K and to hold an Annual Meeting are good business practices --- time consuming, sometimes tedious, sometimes overly cautious but "good" nonetheless.
Because we operate in a wildly litigious environment and the disclosure requirements for public companies are so extensive and most companies err on the side of overstating the risks while almost failing to note the potential upside --- public filings are mostly insurance policies. But they require huge and many times useful disclosures of basic information (e.g. detailed capital structure, management compensation, segment performance, etc.) which serve to dampen the rampant speculation which is an inherent characteristic --- an exciting and a good characteristic for the industry --- of a frothy industry like social media.
One of the most important considerations in regard to "valuing" a public company is who is doing the valuing. A Microsoft, printing shares in the basement, motivated by STRATEGIC considerations prices things quite a bit differently than a public market investor who is evalutating alternative cash investment opportunities and will not be integrating FB's business capabilities w/ some other business. A VC has an entirely different view of the world as he is looking over the horizon.
The strategic valuer cannot place much premium on liquidity of the investment because once it is wound into existing operations it may not be able to be unwound while the stock picker wants to be able to change his mind with literally a touch of a key.
Having watched FB a bit, I would say that just now the company is a bit undisciplined in its communications --- a not unreasonable outcome of such a bleeding edge marketplace and maturing product --- and I would be very, very cautious as it relates to evaluating the value of its stock using a public company lens. The wide and wild range of valuations also strikes me as a not unreasonable reaction to the changing capital markets --- who ever saw "C" @ $1/sh?
I would be shorting the crap out of a stock which had $300MM revenue, a modestly mature product, substantial market share/penetration, no profits and a market cap (perceived or otherwise) of $4-5B.
This means the market they are creating is not demographically techies, young people, niche interest groups- it is everyone.
When you are reaching everyone your revenue models don't have to be earthshaking innovations. They not only reach a broad swath that is growing, they have a lot of data about everyone- much more, for example, than Google has. They not only know our demographics and interests, they know our range of people who share those interests. Our 'influence' in other words. From a marketing POV, we only need to focus our Facebook buys on the influencers and we exponentially increase our reach with relevance. This is huge.
(I removed some of the excess out for now, may put together a blog post on it later)
You know, I'm looking at Facebook from the butt end here, as a singleton user without any big power list of friends or fans or anything, and I'm wondering...but what on earth is FB going to do to get cash in the door to the tune of 70 percent more by the end of 2009?! Don't they have a big burn rate to keep up the servers and staff to wait on all those 275 million users? If anything, I personally pulled back on my small expenditures for "gifts" and game spacebux on FB even with bunches of 3-D and 2-D games uploaded on there -- just because, well, it's a recession.
So they're going to make this cash in ads? Am I the only one who wonders who's clicking on ads served to me demographically that are absolutely hilarious, like "attractive 50-year-old single males* and "teach English in Russia" lol. I never click. Does anybody? Well, they must, I guess, but 70 percent worth?!
BUT! If FB would make some facebux available that I could buy and use not only on little birthday gifts but to tip bloggers who post their blogs and videos and photos on FB, I'm there. I am so there!
What do they have up their sleeves, do you know?
It is time to inject cash back into the Internet everywhere, in the form of micropayments with virtual currency. It will work.
And yes, virtual currencies do work
If it is just a token to entertain people within FB, like playing poker with chips but no cash, it strikes me as a fad.
Compared to their hardware cost growth their revenue growth is actually terrible.
cryptonomicon: http://books.google.com/books?id=FUha9wJrSXMC
Your idea of government seems to work like this "Whatever is the strongest wins, with whatever whims it has".
The purpose of virtual government won't to port data for your whims, it will likely be the opposite, protecting data from being scraped and widgeted to death by others, like yourself.
It's instructional to note that when an SL SEC was made in Second Life, it consisted of all sorts of anonymous and accountable avatars and some downright shady characters, some of whom were then accused of bank or stock market fraud and some of whom disappeared. There were lots of foxes eager to make an SEC merely so they could steal the chickens with impunity. The "Better Business Bureau" also constantly meets the same fate in SL, groups of people wishing to make a whitelist of themselves, and a blacklist of their competitors.
There's an idea rampant on the Internet, with all the Seth Godin's tribe junk and other collectivist ideas that governments should be "just any pickup game of whatever group of kids get together to do something". But the results, over and over, show that this isn't government, it's merely an interest group or a set of bullies.
Real governments are establishment by constituent assembly and draft constitutions. That's an arduous and difficult process, but that's what you have to start with. FB laughably provided only 30 days for this, like it was some sort of focus group experiment.
i envision a government in which i can download my data from one virtual world, and because it shares standards with another virtual world (that is in the same government), i can easily download my data from one virtual world and import it to another, if i so chose. so i view data portability as what keeps virtual worlds honest; they know if they try to cheat you, you will just up and leave. of course, governance is always a tricky issue, which is why all governments -- online and offline -- are prone to death by corruption.
i agree that FB's efforts have been pretty lame on this front, but the issue is that anyone serious about this issue needs to be willing to break out of conventional ideas of law, nation, corporation. As FB is a product of silicon valley, i don't think they will have the mentality needed for the virtual world revolution -- which is the direction they need to go in, IMO, and why i'm a bit skeptical of them in the long-term (doubly so when considering macroeconomic factors)
I would be very surprised if the creativity of the company was not stifled by going public. Yes there is already enormous pressure for Facebook to perform financially as a private company but that is nothing in comparison to what it will face once it has gone public.
Despite all the positives - the buzz & hype around Social Media, the incredible user base, the reasonably solid financials and theoretical projections - are the badly bruised public markets, which still seem to be shifting with the winds and perhaps not yet hit bottom, really ready for IPO's like this? It'd be great to see a rejuvenation in the Internet IPO market, but is it just great fodder for rumors for now? I know your gut feelings (which I take as pretty credible) are that the IPO market is coming back, but do you really think the broader market of investors feels the same?
They get that with IPOs of venture backed companies
This is certainly somewhat wishful thinking but I also sense it based on things I am seeing and hearing
http://secondthoughts.typepad.com/second_though...
Hmmm, that sounds like StockTwits...
More details on Google's history of going to IPO as it relates to 12(G): http://en.wikipedia.org/wiki/History_of_Google#...
Facebook Gets SEC Stock Exemption
http://www.businessweek.com/technology/content/...
Shareholder activity is one thing, but stakeholders have a real sense of ownership in FB, too. So in this sense FB has felt like a public;y owned organization from the start.
I wonder, as there is more money involved how people will feel, who feel like they had a hand in building facebook. It's true that google harvested everyone's links to build their service but there is no sense that you helped build a search engine (and that you are being exploited).
But with FB the harvesting is likely to feel different because so much of FB is visibly user contribution - so it seems reasonable that they are careful and exploring monetization options, carefully. Curious to see how the virtual currency works. Refers via FB Connect could also be monetized. In some sense it might work like an inverse version of Amazon Associates program.
As usual - thanks for sharing your impressions and observations.
Personally, Im going to ignore intentyionally leaked "internal" documents that claim the company will exceed forecast by "70%" only 90 days into the year. I ignore corporate dissembling in general; Facebook in particular has been hamfisted about rosy public pronouncements, and they are in desperate fundraising mode right now, never a good time for reliable forecasts
So what do we actually know? Not much. Fred, your post quotes other pots which themselves quote other posts or hearsay. (Eric Eldon wrote "Based on a budget the company set at the end of last year, it is on track to make a little less than $400 million, I HEAR." Heard? What? And from who?)
One thing we do know is, Microsoft is paying FB $200MM/year just out of love. That deal is almost certainly going away at the end of its term. So even if they do post revenues of $500MM this year, it will be essentially break even - which really means they lost $200MM, when MSFT takes away its gift revenues.
So what's a public-type valuation for a company losing $200MM on $300MM in revenues? $4BN? More like, well, zero. There is no public market for any such company any more, and likely will not be for a good long time.
I love FB -- great smart product, thoughtful (maybe too thoughtful) sense of public responsibility. But the days when massive but social networking concerns are worth huge valuations may have ended in the web 1.0 era of geocities and tripod acquisitions. sure, youtube seemed to resurrect the marketplace for that kind of deal, but that was a dead cat bounce, i think.
In what sens eis that markt "active"? Is there a market maker? Or a trading
desk of some kind? Who matches up buyers and sellers? Etc...
Where do all the costs come in? Server leasing and bandwidth?
Are the ads effective enough to bring in enough revenue?
It's usually in a private businesses best interest to keep their financials close to their chest.
I suspect that Facebook will lower their overhead by moving from expensive leases to their own systems (somewhat like Google).
We who put our sweat equity into social media are not venture capitalists, but adventure capitalists, and our hours and the currency of our attention matter, and they have value. We deserve stock. P.S. We also deserve some seats on the board.
I work hard on social media, all day long. I get paid peanuts, not even subsistence wages.
Your confusing the actors here, Fred. You VCs pump money into their infrastructure, and they provide an interesting tech start-up that you see as useful *for you*.
The rest of us downstream are working in the long tail, supply the overwhelming bulk of content, and for nothing. At least on Predictify I could earn virtual points. At least they have real money in Second Life! On FB, I even have to shell out to send someone a birthday gift!
Zoom out, Fred. 300 million people using something is a collossal, available, needful work force producing great gobs of content, and the infrastructure that you paid for and they coded simply does not offset it.
It's social media. It has people in it. They want to get paid, too.
Trust me, this is the key to monetarizing this stuff, when you can stop thinking you all are doing us a favour by providing infrastructure. When you can start thinking about how we get paid, *too*.
Here is the communists' motto:
"We pretend to work. They pretend to pay us." As soon as you can pay a living wage throughout the system at least for the 10 percent in the power curve that produce high quality content, then people will stop pretending to work, too, and they won't leave these services in droves.
1. Etsy is great, but it's a very niche sort of service for people who make crafts. Not everybody can make crafts as their content. There's a halo effect that takes place with these kinds of new services, too, where people enthusiastically buy and contribute more because they like the idea than because they need the craft. It takes the crafts sale in the parish hall and moves it online. It's a Tupperware party. It's not a solution for an entire modern, complex economy and I'm surprised that you keep touting it as some kind of magic bullet -- it's good for what it is, but can't save everybody. Do you want everybody to go on being like Third Worlders weaving and selling baskets?
2. Ashton Kutcher? Are you kidding? His "career" took off when he married Demi, and it is *old media* that is driving his attention factor -- if Yahoo news and everybody else didn't cover this clash of the titans, and if Larry King didn't use the power of old dinosaur CNN to draw attention to it, Twitter couldn't work its magic. It's like a ton of other one-off hypervents where old media made new media seem magic -- let me now try to get a million followers and uh, take my career in a new direction lol -- not something we all can do, even with brains : )
3. Social capital is an abstraction that social entrepreneurs/philanthrocapitalists love to invoke because it makes voluntarism and free labour sound like it is a repository of value. Well, it is, I'm all for it. But it isn't convertible. It's like the currency of Uzbekistan.
4. Robert Scoble's blog wouldn't have all those visitors if he didn't have "Microsoft" in front of his job title for years, so again, and old dinosaur helped a new dinosaur who is just copying the broadcast model win.
5. No, social media has to pay out within its own system, too. Otherwise, it will burn off and die. People become surprisingly casual about abandoning faddish social media in droves and droves and leaving it unattended. Social media is a tool to use in other careers, but then, let's not pretend that reputation on it and social capital feeds families, it's labour inside an organization or as a sole proprietor that then actually does the feeding. You seem to want social media to be a tool where things happen outside of it, but yet turn around and claim magical properties for it inside, too.
I'm actually all for magical properties. I earn hundreds of real US dollars off renting virtual space and selling crappy little content in the virtual world of Second Life, even being a dummy. So I push this model not because I have "no life" but because putting micropayments into systems of social media works to pay people.
The task is to see how you can replicate Etsy or SL or anything that is monetarized through social relationships and "social capital" -- and I think it's hard -- but it's especially hard with an attitude that says Mark Zuckerberg is doing me a damn favour just because he lets me put my rolladex and photo album on his damn servers. Meh.
we need more competition amongst virtual worlds. also, i think we will see facebook stagnate as a destination site unless they can start to embrace and develop a virtual economy. though facebook has enough users and user data where they have multiple business options, perhaps even too many.
Jeff Jarvis is wrong, links do not pay out except in the sense that they do with Ad Sense, and he himself with all his buzz stuff only made $4000 off his blog last year. Not an economic solution
http://www.youtube.com/watch?v=2lKd8SyGJWA
But I suspect they do not spend as much on infrastructure as people think. They are also spending a lot on developers, product managers, bus dev, sales and marketing
That in its entirety is the infrastructure I was talking about.
1)YouTube invites it's big movie posters into an ad hosting program.
2)squidoo starts from square one by giving developers 50% of affiliate money's earned (they negotiate a higher base rate from amazon as well)
I'd love to play in virtual economies, if it could earn me enough to play in real ones.
Fred, great post. But I believe there are significant costs that Facebook isn't already paying.
Indeed, Facebook has been operating under increasing public scrutiny. But: (1) they don't respond to most of it; and (2) it's a fraction of what they would have to deal with if they were actually public. Dealing with analysts and having a constant interaction with the media is taxing. And while there is an active secondary market in employee shares in Facebook, that hardly equates to the market pressures they would face if they were actually public: the makeup of investors would be much different (more speculative, less patient), leading to more short-term focused quarterly earnings targets and probably even a more risk-averse culture.
Let's not forget our friends at Yahoo and the costs they've paid, especially in stock price. Imagine the hits to Facebook's stock price with folks like Jim Cramer discussing the infighting of management, the continued exodus of executives, the twitterish redesign, the beacon disaster, the "who owns your data?," the dearth of transactional revenue, the news of them knocking on doors for more capital...
Perhaps going public is the best thing for Facebook. It would force them to pay the costs of growing up.
The strength of the Facebook platform is building relationships, but their current revenue model doesn't exploit that very well. The banner ads are faceless and random.
Instead, every user could choose a sponsor advertiser, who would pay that user's annual membership fee, be identified with that user in some way, and have some type of regular communication with the user.
Facebook currently has revenues of about $1.50 per active user per year. If they're breaking even, then their costs are in that range also. So let's say an advertiser would pay $5 per person per year to be in the program. That's 70% gross margin for Facebook. It seems like a cheap expenditure for an advertiser, to get a user who is choosing to have a relationship.
People who want to opt out of sponsorship could pay $10/yr. The first few months of membership would be free to all. Total gross margin on this part of the business would be even higher than the sponsored side.
It seems like Facebook has the size and credibility to get a solid list of sponsors right out of the gate. The most natural participants would be companies that already have a big fan base on the site.
The model could also work with other sites that have a good user base, where advertisers want a long-term relationship.
I like how you drill down into ARPU. I know how much it costs to operate some of our social media companies and its pennies per user per month.
So all these people claiming that facebook is going to get killed by server and bandwidth costs may be barking up the wrong tree.
Hosting images and video may change that equation for facebook, I don't know by how much, but I am fairly sure that if you can make an ARPU of $1/month, you can make money hand over fist
fred
Second Life has about 8000 servers and 750,000 repeat log-ons last month, but because they have an interactive streaming 3-D world with a billion pieces of inventory dynamically user-generated, their costs are pretty intensive, I would think more like a dollar per user. And FB is going more in that direction of more interactivity, more applications, more videos, etc.
https://blogs.secondlife.com/community/features...
even so you can see I drill on them in the comments as do others
But it's impressive, because it means that in this economy of 124 million user hours this quarter that generated $120 million dollars, you get paid $1 an hour while in this world, so to speak. Now, that's poverty-level wages, but when you think that I don't get paid to Twitter unless you count the ad sense I sell by driving followers to my blog, and I don't get paid on Facebook but FB is only a cost center to me for birthday gifts, it matters.