Facebook Isn’t Worth 100 Billion…Except When It Is!

Michael Hedges June 15, 2011 Follow on Twitter

Facebook frenzy erupted again. A spring 2012 IPO could be worth USD 100 billion even if growth has stalled. And the name is easier to pronounce than Icelandic volcanoes Eyjafjoell and Grimsvotn.

The IPO (initial public offering) is fairly straightforward. The investor set – hedge funds, private equity, venture capital, others with more money than sense – are salivating at the very idea of an IPO valuing one company greater than many countries. Early investors want to trade their stock and take a profit. Vested Facebook employees would also like to cash out and retire at age 25 to Bali or Mauritius. These things we know. Caffeine alone doesn’t create a buzz like this.

US cable business news channel CNBC reporter Kate Kelly breathlessly told (June 13) those sitting on the edge of their razorblades that “we could see an S-1 as early as October or November this year. People who are on Wall Street and tend to track in this information tell me they think the IPO, if and when it happens, could value the company at north of a shocking USD 100 billion.” The US Securities and Exchange Commission (SEC) requires companies to disclose a count of their shareholders. When that number reaches 500 an S-1 filing is required, opening the IPO door. This is but a simplistic description; see your investment banker for details. But Goldman Sachs is already in for USD 1.5 billion.

For a company with grand ambition an IPO is a rite of passage. In return for a pile of money company founders then receive hourly text messages from new shareholders offering all sorts of advice. Brazilian energy giant Petrobras holds the IPO record, raising USD 70 billion in 2010.

Floating Facebook, which some would like to do in a rather different context, throws the tech/media sector into a whole different context. A USD 100 billion valuation would be about 50 times revenue, according to the estimates. Normal acquisitions are rarely valued about two (2) times revenue, but these aren’t normal times and Facebook isn’t either. Cynics among business wags say 90% of that USD 100 billion valuation is hype.

But hype is what makes the world go round. Without it investment bankers would still be in pawn shops and half the stars of the Top 40 would be busking for bread. And what of the advertising people? Selling apples on street corners, likely. But I digress.

Facebook founder, Winklevoss twins’ claim notwithstanding, Mark Zuckerberg promised to reach a billion users, which would be about half of all internet users on the planet. An entire industries have sprouted just to watch Facebook.

One of those sprouts, Inside Facebook, reported (June 13) a dip in user growth, comparing May to April figures. While total worldwide Facebook users is still growing at about 20 million a month and closing in fast on 700 million growth in “mature markets” is slowing. Facebook will be five years old in September, seven if you count the early years in a Harvard dorm room.

American, Canadians, Brits and, yes, Norwegians, are “giving up” Facebook, opined countless wags. Those early adopters are now bored and have moved on to, well, something. “People get terribly excited about something new and after a while the novelty wears off,” said internet psychologist – certainly a growing specialty – Graham Jones, quoted in The Independent (June 14). “In all aspects of our lives we are addicted to novelty, so Facebook should be the same.” Or it could be the early-adopter Anglo-sphere is tiring of Facebook being co-opted by those master of hype, the PR agents.

Brazilians, Mexicans and Indonesians are merely catching up to the hype, adding Facebook users in double digits, offered mainly newspaper wags. Chinese and Russian internet users have been slow to join Facebook, local social network portals being dominant. Of course, Chinese authorities continue to block Facebook accounts. Mr. Zuckerberg is sending “diplomats” to explain his message. If diplomacy succeeds in China that one billion user goal will be so much closer.

French authorities recently banned radio and television newscasters from asking listeners and viewers to “follow on Facebook.” There are 21.9 million Facebook users in France, a bit more than a third of the population, growing 16.6% in the last year according to Inside Facebook. No diplomacy can overcome the culture vultures.

Still the question remains about a business model for Facebook. Certainly the original business plan included those fateful words “and we’ll make lots of money from advertising.” It has, but not as much as Google, which has seen the light and branched out into mobile phones.

The real value of Facebook – and its brethren in social networks – is as an enabler. Without Facebook game developer Zynga – think FarmVille – wouldn’t have the traffic to build its business to a value of nearly USD 20 billion. It’s soon-to-float IPO will offer just a small slice, less than 10%, but enough to fuel the hype.

See also in ftm Knowledge

Social Media Matures (...maybe...)

Hundreds of millions use social media. It has spawned revolutions, excited investors and confounded traditional media. With all that attention a business model remains unclear or it's simply so different many can't see it. What is clear is that there's no turning back. 42 pages, PDF (June 2011)

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