04 January, 2011

Dot Com Mania II


Is Facebook really worth $50 bn ?? Yes, billion that is, not million. Or are we seeing the second incarnation of the mindless hype that we saw at the dawn of the century which made the word dot com a household name ? Judge for yourself.

What happened yesterday was that Facebook raised the first tranche of $500m funding from Goldman Sachs and a Russian investor. Goldman Sachs is putting $375m of its own money . Extrapolation is always a dangerous thing, but if you take the licence of using the same valuation per share to determine the value of Facebook as a whole, it somewhere close to $50 bn. Facebook is not a listed company; so we should be careful. But still such a stratospheric valuation ??

Facebook's revenues are reputed to be some $ 2 bn. This all seems to be old style internet ads - very few media companies have succeeded in that space. Google is different - its advertising model is such that a fair proportion of the searches actually lead to a commercial transaction. Clicks through to Gils on Facebook may yield captivating information on this incomparable blogger and such attendant pleasures, but are unlikely to yield even a dime !

So why this valuation ? I suspect another avatar of the dot com mania that gripped the world in its first edition. Great businesses are built on great ideas alright. But they also need boring stuff like profit and loss statements. They need resilience (regular readers will note this flavour of the month). They need robustness. They need sustainability. Then stratospheric valuations are justified.

It would be fairly obvious by now that this blogger is not a fan of Facebook. The only reason he enters its portals is to play an occasional game of Scramble. He is completely unable to fathom the joy of posting his mugshot or boring mundane everyday activities for the world to see. Readers might deduce from this admission that he's a bit of an old foggy.

Well, he's in elite company. Warren Buffet was called an old foggy in Dot Com Mania I !

15 comments:

RamMmm said...

LOL on the reference to Swami gilsananda!!!

:-D But the average time of users of Facebook as I recollect (or I am as fogged of mis-interpretation) is around 50+ minutes per day. That is an awesome stickiness, indeed, maybe prompted those investors to make hay while there is still some sun.

Disclaimer: I am not on FB or Twitter and hopefully I remain that way though once in a while the devil tempts me. :)

zeno said...

Well i too never liked FB still i dont!
Before FB could be dismissed, we have to consider few things
1) Stickiness factor
I have seen a 70 year old young man spending the entire day in FB!
Less than 13 year old kids use FB by giving false address.
2)Wealth of Information
I came to know more about my neighbors through FB than through casual interaction
3)Groupon like deals. Recently FB did something similar to this which [though i cant recall/retrieve right now]once it is fully operational more targeted ads are possible which in turn leads to higher revenue and could beat the Google in their very own back yard

Well landing on gils page could generate a dime.
Say Gils says the book/movie/hotel is good. Right next to it you see an ad offer to buy it.
FB definitely has potential unless something comes up and takes over it as FB took over orkut myspace etc

Coming back to Goldman doing such a deal the following link makes sense
http://dealbook.nytimes.com/2011/01/03/why-facebook-is-such-an-important-friend-for-goldman-sachs/

May be i will send across "The facebook effect" in mail ;)

zeno said...

Too bad when i was typing such a long comment amidst my hectic schedule, Ram beat me :(
BTW, Boss where is ur FB link???

zeno said...

*It is not false address but false age. Coming to Google vs FB, FB could be te new Google in few aspects. I usually see most of my friends on FB chat rather than the google talk, these were the people who earlier used to be on yahoo chat. Nowadays one gets informed about baby borns marriages all via FB rather than mail invites. So FB may be worth it. After all this money is nothing for Goldman and Microsoft.

Striver said...

$50 Bn?? Wow ! Dont know if it is worth as much or where they make their money but I certainly feel it has given a good medium for virtual socializing! Yes, I'm hooked on to FB for sometime now. It gives me a comfy feeling that there are lot of people around me. May not make much sense if you a'int into it!

Vishal said...

Well if you think you are an old foggy (it is more than helpful in tough situations, again wise I guess ;-) ), I do not know where I stand. When Facebook first came in Indian horizon some 18 months back, I entered FB only to play the standard VI game of word challenge. But then it helped me find so many old friends which was pleasantly surprising. In fact, I called few of them on the mobile no. taken from their FB profile. Definitely, it is far too boring for me to post the mundane acvities. But as RamMmm says it is a massive hit so let the investors make some money.

@zeno - I tried looking for boss's FB link passionately quite a few times but to no avail... hope someone spills the beans now as you have already raised the question ;-)

KC said...

USD 50bn valuation does sound whoppingly large for a new company. I can't imagine any company creating its brand value so fast, probably google did but not so quick. Hopefully GS did the basework before investing, unless it's so attracted to the pit dug by its cousins in 2008. And, we would definitely come to know about the boring stuff as soon as it goes public or SEC does some investigations.

On the popularity, it's not only a young or old people choice now. With 500mn base and still increasing, I think everyone who uses internet has an account on FB or once had an account on FB. I also found out that after sometime people get bored of the FB tittle-tattles but then they start missing it and re-activate the account.

Ramesh said...

@RamMmm - ROFL on Swami ..... !There is no doubt at all on user stickiness in Facebook ; but I don;t see money from it.

@ zeno - Don't buy the stickines logic. Stickiness doesn't translate to dollars - In the olden days AOL and Yahoo also had great stickiness. It went nowhere. And the online user is so fickle. Remember MySpace ??

Btw I don't have a Facebook link. I use a dummy id to play Scramble; that's all.

@Striver - I can understand the comfy feeling. After all, our blogs generate the same feeling too. I have no doubt that it is immensely popular. But that doesn't translate into a business valuation automatically.

@KC - As zeno said its small change for the likes of Goldman Sachs and maybe its just a punt. Yes, Facebook is immensely popular and will remain so; human need for affiliation in any form of media is so strong.

@Vishal - Can understand the connectivity Facebook provides. If you are comfortable with that, then its a great place to hang out in. But in all your presence have you transcted one commercial transaction through it ??

No I don't have a Facebook page. Not tempted still !!

Sandhya Sriram said...

Ramesh,

I have a lot of admiration for the concept of Facebook. i have met all my school friends with whom i had lost touch a decade ago through facebook. i even caught up with one of them. when i keep seeing their stuff on facebook, i feel connected to them. i saw my own school day photos copies of which i did not have after my friend tagged me on them.

for commercial advertising, one of the biggest challenges which corporates have is being able to gauge the profile of the audience they are trying to reach. this is a platform, where i know exactly who saw my ad, what is his age profile, demo profile, kind of games he plays, what he likes... every thing.

I think, it is just a matter of time, that facebooks and linkdyns of the world are gonna find a way of selling this information in an analyzable form and that is when the next phase of advertising will evolve. we all know the DD days to what cable TV has done to corporate advertising. I am not really an expert to comment on the accuracy of the valuation, but i feel, this will evolve in the next 10 years in form which none of us would have even wondered today.

J said...

I think the scariest part about FB is that the obvious route to making money is selling your (what you thought was private) information. What is it about facebook that makes people share personal details with 300 of their closest friends! I wish FB didnt have to worry about boring stuff like profit and loss statements so that they don't figure out ways of "legally" using all the data. I know I sound like a paranoid luddite but this is scary stuff and we treat it like business as usual.

Preeti Shenoy said...

Fact is, right now FB is here to stay. Ten years hence no one knows.

Earlier the craze was Orkut. But now it is FB.

There are definitely pros and cons of being socially networked and not being so. It all depends on how one uses it.

You can set how much info you really want to share, including your display pic, but usually FB settings are slightly more complicated and they keep changing it. So one has to be alert. (or have a lot of geeks as friends who keep alerting you!)

Different people use FB differently and not all post their boring (on interesting) mugshots and daily updates :))

Like Sandhya has mentioned above, the advantages are indeed numerous. It all depends on how on views it and how 'networked' on wants to be.

Vishal said...

Oh yes Ramesh - completely understand your point. The whole set of assumptions for valuation is something needs strong support backed by the finanacials and I have always been curious how they (Dot com companies) make money and how their P&L looks like.

For users, it is fantastic... but for investors, sustainability and resilience does matter.

Deepa said...

What fb has done is taken social networking to a different level. It's no longer just about crazy people updating about brushing their teeth to burping after dinner, but u would lots of companies trying to do branding and getting in touch with the consumers first hand. Pepsi runs a huge campaign for one. I know a young gun who has started off on her own as a 'social network branding' consultant and she doing pretty well. I have a feeling it's more than mere ads. Although I don't know what valuation model is being used, but Fb does have something going on there

As far as I go, I can't live without my games of scrabble anymore.

.

Ramesh said...

@Sandhya - Without a doubt the direction of evolution would be strange and unpredictable. Clearly this is a huge phenomenon. This post was simply on the valuation. For something so unpredictable, such high valuations (5 times sales) reflects a bubble.

@Preeti - Not commenting at all on the usefulness of Facebook to a consumer. I appreciate the value many find, although it doesn't appeal to me. My point is just that I can't fathom the valuation at all.

@Vishal - Precisely.

@Deepa - Well, I wouldn't dream of taking you on on Scrabble :)

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