Facebook Loses Face Value – ls Seppuku Imminent?

facebooksmokeFacebook, the darling of Web 2.0, has been the subject of more conjecture lately than perhaps any other startup. Much of the “speculation” has been in valuing the world’s most popular social platform. News today from the Associated Press suggests that putting a price tag on numbers of users or innovation is becoming even trickier. The value of Facebook varies wildly depending on who’s numbers you use. Is Facebook worth $15 billion, $5 billion, $3.5 Billion (as today’s story suggests), or does anyone even know?

According to the AP story, confidential documents from Facebook’s court settlement with ConnectU confirms that Facebook’s own valuation is $11.5 billion less than 2007 projections. Evidently, Facebook was also very determined that details of this settlement were not revealed, and understandably so. A devaluation from $35.90 per share down to $8.88 per share is cause for alarm even if the company is private. To put all this in a little better perspective, let’s take a look at even more numbers.

You Too Can Make Millions On The Web!

Michael Arrington actually did a superb job of “forcasting” Facebook’s impending monetization woes back in October, 2008. According to Arrington (and subsequent reading by this writer confirms his contentions), Facebook is probably bleeding money rather than making any. The expense of running the Facebook show, with 750 employees, huge bandwidth, and other scalability issues, likely exceeds their estimated $260 million in revenues per year. Add to this the recent economic woes, and the problems ad networks are having, and Facebook joins a group of Internet investments that may not hold water.

Or Can You?

In a Telegraph article earlier this month Rupert Neate and Rowena Mason perhaps revealed a little more evidence that Facebook is desperate. According to them, Facebook is on the threshold of giving up user data for dollars even now. In an interview with the Telegraph, Randi Zuckerberg, Facebook’s director of global markets said; “multinational companies had been bowled over by the ability to receive real-time feedback from the site’s millions of users.”

For their part, Facebook refutes the Telegraph report and insists that they’re not planning such a product. Given Facebook’s previous disastrous attempt at utilizing user data with Beacon, that’s probably wise.

Facebook choices narrow

Facebook choices narrow

Pennies Make Dollars – After A While

So, Facebook investors have half a billion dollars tied up in something that may not ever make a dime. Billions have been invested in companies based largely on traffic numbers, and who-knows-what kind of business plans. In a time of grave financial crisis, Facebook’s value has to be ferreted out by AP reporters? Is it just me, or is there something wrong with this picture? If borrowing money relentlessly is a new business plan, I know of many who will sign up. How long will it take 150 million Facebook users to pay back half a billion plus interest?

The Important Numbers

IDC a global market intelligence firm said advertisers are turning their backs on social networking sites because they have a lower “click-through rate” than traditional online ads. Only 57% of social network site users made one purchase per year after clicking on an ad, which is far below the almost 80% for other sites. Paul Lee, Deloitte’s director of research for technology and telecommunications, almost hands Facebook investors their katana with this statement:

“The book value of some social networks may be written down and some companies may fail altogether if funding dries up. Average revenue per user for some of the largest new media sites is measured in just pennies per month, not pounds.”

Fully 50% of Facebook’s user ranks are international, and as Arrington points out, virtually non-monetizable from an ad standpoint. According to the click-through figures mentioned, that leaves about 40 million users buying something once a year to keep the platform afloat. All I can say is, Microsoft better hope they buy Office suites rather than books from Amazon. Search accounts for fully 44 percent of all Internet ad revenue now, and Google is losing hundreds of millions in this downturn.

I expect today’s news, for the savvy investor, brought on thoughts of ritual sacrifice and worse in some sectors. As a fan of all things innovative, I hope Facebook and the others can soon come up with a more stable monetization plan. Or, at least a better self evaluation.

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  • http://www.tyssendesign.com.au Tyssen

    Seems like you’ve mixed your metaphors with the imagery chosen for this article and you don’t actually mention ‘going up in smoke’ anywhere.

    • http://www.pamil-visions.com Phil Butler

      Hi Tyssen,

      Man you are observant! The piece ran a little long as there was so much data and hub bub about this. I had a section referring to someone smoking something and had to leave it off, but I like the mashup. Sorry. I know you lovem my metaphors any way though. I am working on a post now written entirely in JavaScript. :)

      Always,
      Phil

  • NeoXLT

    According to Facebook’s math they value each user at $76.00?? Seems a little high.

    • http://www.pamil-visions.com Phil Butler

      Good point Neo, my simpleton impression of valuating businesses was that you take all the money invested, ad capital assets, subtract liabilities and you get somewhere near what something is worth. I think Facebook is using the “cattle drive” method of value where people are like head of cattle.

      Always,
      Phil

  • http://www.studio-gecko.com/ XLCowBoy

    Anyone with any business sense could see this. Facebook needs to restructure itself if it intends to generate money and balance expenses. If anything, they should outsource high-stress features such as chat, images, etc. to outside partners and companies.

    This is why Adult Friend Finder made money and everybody else didn’t. They charged you to use it.

    • http://www.pamil-visions.com Phil Butler

      Cowboy, thanks. The whole idea of monetizing people is crazy, the commodity has to be valued and the revenue.

      Always,
      Phil

  • http://www.edelegate.com jplancaster

    I am sure we all could see this. Anyone running a few sites knows where money is made and where time is slain.

    • http://www.pamil-visions.com Phil Butler

      Yes J, We all knew this inherently. The issue is that they are running out of money and so are any number of others. Soon, the red ink has to disappear, especially given the money situation now.

      Always,
      Phil

  • socialexpert

    Advertising has to change for the Internet at least. We have all developed a kind of “ad blindness” in that hardly anyone clicks. The problem is that the ad people and the developers are not addressing this.

    • http://www.pamil-visions.com Phil Butler

      Hey Social, Yes! Advertising on the Web cannot continue the way it is. Inventing new methods and more directed versions is the only way any of these sites can monetize.

      Always,
      Phil

  • Wayne – GetIceberg.com

    Very interesting. There are going to be a lot of overvalued companies wishing they’d done an IPO before the bubble burst (again).

    Facebook apps is getting closer to it becoming a business but still has a LONG way to go.

    I wish them the best though, it is an excellent platform that provides an incredible amount of value and to be honest all this speculation only helps spread the word about facebook and attract more users if you ask me.

    • http://www.pamil-visions.com Phil Butler

      Hi Wayne, I think Facebook has enough users already, they need to figure out how to A – provide more value, and B – direct advertising appropriately. Thanks for your comment.

      Always,
      Phil

  • Captain Obvious

    I’d pay up to $20 per year to use facebook ad-free. Preferably less, but I would pay because I value the service and hate ads. They could have a free account with lots of annoying ads and some feature limitations, a cheap one with fewer ads and some extra features, and then a premium one with no ads at all and perhaps some kind of power-user features. Duh. Problem solved. I don’t understand why web companies have such a fear of charging people for a valuable service they work hard to provide. I don’t work for free, do you?

    If even a modest percentage of the users paid, that’s still a lotta cabbage.

    On the other hand if they do this and get too greedy about it, I would cancel my account completely.

    If it starts to fail, the users should start a foundation and raise funds to buy it and make it a cooperative owned and run by the users.

    • http://www.pamil-visions.com Phil Butler

      Now you are talking Captain! I would not personally use it on a paid basis, as all the other free variants are more than enough for me. You are insightful in pointing out one great way for the best services to monetize. i think part of the problem is our “Free2 mentality. Once Facebook and others drop off the radar because they run out of money, perhaps the collective moans of the millions will lead to people realizing that nothing is free.

      Always,
      Phil

  • Kristen Nicole

    Well let’s remember that the $15 billion valuation is based on preferred stock, which is different from the common stock valuation of around $4 billion, used in the ConnectU settlement.
    But in terms of Facebook’s necessity to monetize, it’s gotta still be a top priority for the company! And as bad as it may seem, selling user data is probably the most lucrative way to go.
    I think there are a number of ways in which Facebook could sell user data without actually pissing off the users, but it would need to be a long and slowly implemented process and would require a great deal of investment (money and time) on Facebook’s behalf.
    I think that Facebook has already taken some steps towards this, and we’ll see its “master plan” come to fruition as time goes on.

    • http://www.pamil-visions.com Phil Butler

      Thanks for the distinction K. Yes, the valuation has its “variables” shall we say. In the court case, it was apparent that Facebook wanted to “low ball2 the serttlement valuation. Good business I guess, but if they were innocent, it seems to me they would have paid millions in legal fees rather than settle for even $50 million. That buys a lot of lawyers.

      Monetizing is not al that complicated in my view. As some have mentioned, paid versions, new age ads, and other value can be monetized. The problem with Facebook and others is that an old world advertising methodoloy was used to valuate people. It was based largely on TV models and print media, when anyone knows the Web does not work like that. Anyone who wants to see some better ideas might email me :)

      Always,
      Phil

  • Anonymously

    The $15 billion valuation was based on a business deal — not all 100% equity deal. Also, because it was a bizdev/equity deal — Microsoft had every reason to try push the markets value of facebook. Lastly, at that point and time facebook had a lot of leverage over Microsoft because the first round of the AD deal between the two was about to expire. Anyone that thought facebook market value was 15-”B” clearly was not in the market.

    • http://www.pamil-visions.com Phil Butler

      Good point Anony. The leverage was because MS was afraid Google would beat them to it too. Facebook was in a good position then. The amazing thing to me is that with all these billions, none of these people can come up with a way to make it work for them. I am not an ad man myself, but I bet I could hire some genius ones for a million or two. Just thoughts.

      Always,
      Phil

  • mkdrums

    Seriously, charge all interested users $5 a year ( I would pay that ) chop the work force in 1/3 (What on earth do 750 people do?) quit adding features ( there are way too many already ) and settle down into a real biz.

    Plus the people voting Zuckerberg startup CEO of the year – when his company is 5 years old and bleeding cash – are not helping the situation.

    @mattkern

    • http://www.pamil-visions.com Phil Butler

      MK, I do not know why these mega startups cannot follow logic as you suggest. There used to be a saying that went something like; “Did you feel your change hitting you in the back”, when people bought something at the wrong value obviously. half a billion dollars could fund any number of winners in my book. I think someone is going to feel something hitting them in the back soon. :) Thanks for your input. Yelling Yeeeeha! and allowing these people to have a mutual gratification society is not helping anyone in my book either.

      Always,
      Phil

  • Sporkman

    I agree with mkdrums, 750 seems like an impressively large workforce to develop and serve up a relatively straightforward web service. They should really take a long, hard look at their bottom line, and perhaps try to “maturify” their service by focusing less on new features & more on making their code and data schemes more efficient, thereby controlling the need for the large amount of server/bandwith resources.

    • http://www.pamil-visions.com Phil Butler

      Exactly Sporkman, I cannot visualize 750 people milling around tweaking on servers or in offices getting coffee for one another. There could however, be one heck of a party going on. :)

      Always,
      Phil