I remember how excited average investors were at the prospect of a new way of going public when Google announced its innovative auction IPO. "Finally, Wall Street banks wouldn't be able to crowd to the front of the line!" Their public auction, their "don't be evil", and their continued use of their power for good -- like their trick to get openness principles adopted during the wireless spectrum auction -- all exemplified a company thinking and acting like a good corporate citizen at all levels.
Contrast this to FB. They are actually cozying up to Wall Street rather than eschewing them. "Don't be evil" was replaced with a series of privacy gaffes, a flurry of lawsuits surrounding the company's founding, and a CEO who has called early users dumb fucks. It's sad to see how Google's pioneering isn't being emulated by the next big tech company.
The behavior and culture of a company is often a direct reflection of the character of the people who founded it. Unfortunately, very few 24 year olds are mature enough to handle the responsibility and decisions that come with a large corporation - even though the corporation may be successful, other problems become evident. Take Etsy, for instance, another company founded by a 24 year old. While they have been successful overall, the company culture is atrocious. It's not just youth that is the problem, of course.
I've always figured it was, and consequently I've never really hated Microsoft. I've always been impressed with what they managed, and by extension impressed by the man. It probably helps that I didn't personally suffer the worst of their marauding.
There is plenty of discontent documented on the web, in blogs, on Etsy's forums (which are difficult to penetrate, since the search and navigation features are poor), on the forums of other marketplace sites, on Twitter, and so on.
They have a knack for turning away people who should be their biggest supporters. I can think of many successful shop owners have left after 2-3 years, disappointed by the way the site is administrated.
Yeah this is my experience with Etsy as well. I have a poor opinion of the company from talking to sellers who are friends.
I wrote a scraper of their site for friends to get their sales data for taxes. Years went by before they bothered to implement this trivial feature. My code worked because in two years their pages didn't change at all. Sorta crazy.
"And don't give me that crap about VCs being "early stage" and wanting to cash out of a "mature" investment. These people are as money hungry as any other institutional investor, and would let it ride unless….they saw something that suggested that the era of stupendous growth was over."
The author doesn't seem to understand how the venture asset class works.
Venture funds are owned by their limited partners (LPs), and typically have a fixed, 10-year life. After 10 years, the fund liquidates and the LPs (hopefully) get a nice return on their investment.
It's been 6.5 years since Facebook's first venture investments. If the investment vehicle was already 2-3 years old at that time, then they have to liquidate soon, even if the managing partners believe Facebook will continue to appreciate in value.
The author seems to think that anytime an investor wants to cash out, it's because they don't "believe" in the investment.
I remember when Goldman Sachs went public in 1999, only 12% of their shares went public. The remainder stayed with the partnership. I'm not sure (or able to quickly find) the current ownership, but it's certainly not ALL publicly traded.
So $50 billion would get you about one-fourteenth of Goldman. Not half.
Edit: grossly mis-remembered my facts. 511M shares include both stockholders and the shares of the former partners.
The $88 billion market cap for Goldman Sachs is the value of all GS shares, including those held by insiders. So if you could buy $50 billion of GS shares at the current price, you'd own about 57% of the company.
If I had $50 billion on this day to buy part of 1 company, I'd take Goldman no question.
A few years ago if you got Facebook stock at a lower valuation, sure that would make you a lot of money. But if Facebook makes $2 billion now, and they already have 25% of the internet users as members, where does the growth come from? 50b valuation is right given their current revenues, but they're not going to go from 25% to 100% of total internet users. And their cost structure will not go down to 0. So we're basically betting on how much more money Facebook can squeeze out of each active user. I just don't see it being a huge amount.
Where as GS has a lot of ways to make money, and has proven their ability to make money over and over and over again through a lot of markets and a lot of times. Facebook could peak at $100b and you only doubled your money. (Which isn't that good for this kind of investment).
While I'm sure it's a factor, I'm not convinced that Facebook's growth needs involve having to increase their userbase in that manner. There are still many ways to monetize the existing one since I don't believe they've done that very efficiently yet.
There is a lot of room for internal growth. For example:
"Places is currently available in a few select countries with many more on the way."
I'm sure this isn't the only significant new development that is not rolled out around the world. With Facebook rolling out Places, they are also building out their global sales team.
However growth isn't everything. The cost of growth is important too! And we don't know what that is.
I think you're missing the danger that a lack of growth involves to Facebook.
Facebook isn't monetizing their existing customers and their customers are there because "it's the thing" - all one billion of them or however many they currently have. We aren't just there because everyone else is, we're there 'cause it's like a new club, a new experience, new thing. NEW. If everyone's on Facebook and it's just that dumb place that everyone on, then... the appeal shrinks...
If Facebook growth visibly stalled, if I'm no longer having that interesting experience of old acquaintances becoming newly visible, then suddenly the process of Facebook shrinkage appears. And if this is the moment Facebook is visibly trying to get more out of me, then the shrinkage might really accelerates.
I've seen just a couple friends quit FB recently. Not a big trend but I also haven't seen more people join.
Imagine if ... it was ... the most ephemeral $50 B ever...
I think Facebook's way past being the 'new' thing. People are finding a use for it beyond 'old acquaintances becoming newly visible".
You have the average user who uses it to keep in touch with friends, but you also have a growing number of users who are using Facebook in more and more creative ways. I personally know a couple of hundred friends who have thousands of pictures hosted on it (not something they'd give up easily), I've seen my mother find all her elementary classmates and organize a reunion spanning several states all within 2 months (surprised even me, I didn't think she got past her yahoo email).
My point is, Facebook's utility for its users is still increasing, something that stagnated in Myspace' case. We haven't even touched on the social gaming aspect of it (If I see another cityville invite I swear I'll block them fools). Growth to me involves more creative ways to involve its existing users, as well as of course growing its numbers (which it is). There's still the potential of its international users (which I believe is larger than its US Mainland users), increased corporate/business identities on the site, social commerce (barely touched), organized product reviews, that new mail system it's supposedly rolling out, and so on. We can talk numbers, but potential for monetizing their existing userbase appeals to me more.
This is not a correct understanding of "market cap". Goldman's market cap includes the value of ALL shares, not just the shares available for public trading.
The only people what can make money on Facebook stock, is Chinese government officials. All they need to do, is to accumulate $FCBK stock and then allow Facebook.com to be used in China. Number of Facebook users will jump from 0.5B to 1.5B, same with the valuation from $50B to $150B ;)
This makes me wonder about net neutrality. If you had the jump on the announcement by a huge data carrier of site specific charging then wouldn't that give you a similar albeit smaller advantage?
"It's hard to see why, though: DST got in at a $10 billion valuation in May 2009. Facebook's user base has more than doubled since then. So its valuation should…quintuple?"
Good point, according to Metcalfe's Law [1], it should actually only have quadrupled.
It's troublesome if you want to invest in facebook. Facebook has 10x as many users as myspace, and they've translated that into a great deal of hype. But they've yet to translate it into sizable revenue, let alone into profit.
Myspace hasn't released revenue information for 2010 yet. It's likely that the ratio will change substantially in facebook's favor as their revenue has grown considerably (assuming facebook's revenue reporting is trustworthy).
Nevertheless, Facebook's valuation is still shockingly inflated. Compared to Apple they have 1/6th the valuation at 1/30th the revenue, 1/4th the valuation at 1/12th the revenue of Google. It seems likely that Facebook is overvalued by at least a factor of 3, perhaps more (since both Google and Apple are bound by stringent revenue reporting rules).
At 1/6th the valuation of Apple (which is widely considered to be a bit overvalued today as well) but with one 30th of the revenue (
"Reiner noted that Wall Street investors typically grant companies with 70 percent earnings per share growth a "premium valuation." But AAPL stock is valued at just 14 times its EPS, which is equivalent to the Standard & Poor's average."
The fact that Apple is only trading at the S&P average relative to EPS, and is still the second most highly valued company in the world, with 70 percent EPS growth, puts into perspective what an absurdly good job they're doing.
OK, so the costs of running Facebook from a pure employee point of view are smaller than Yahoo. And their cost for traffic is certainly lower (as the YHOO numbers include revenue distributed to ad carriers).
But does the 2B revenue really justify a 50B valuation?
You'd hope so! I know most of Facebook would be classed as engineers, vs. a lot of Yahoo as sales, support, etc. But really? 1/10th the employees, you'd expect their salary bill would be less.
It might be an naive assumption, but aren't shares for options usually set aside relatively early in the process?
Interesting comment, just provoked me to do a little research, as I had initially thought that stock options would be accounted as a future liability, and only a cost, at their strike price, when vested AND executed.
Why is Mark so reticent to IPO? Because he loses control? Or because that means making the numbers public, and people will see just where the money is going. Either way, if the CEO doesn't want to go public and may be forced to, that is not good.
Bill Gates was another person who didn't want to do an IPO. He almost cancelled it a number of times during the process as he felt it would just be a distraction to actually getting real business done. Mark Zuckerberg could have similar concerns.
He's said (maybe at Davos?) that the main reason is because Facebook has a lot of stuff they want to launch that is high risk and might not be acceptable to see come from a public company. (For example, could you imagine what would have happened the stock when Beacon came out?)
He's only ever really had to answer to himself, right? From what I know of him, he probably likes that a lot more than having to answer to a bunch of shareholders.
One of the downsides of going public is that the customer base shifts---no longer are your customers the ones that buy/use your product, but your customers are the ones that buy your stock. And because of the legal requirement of increasing shareholder value, the company may be forced into short term profitability (make the numbers next quarter) instead of longer term long range profitability or stability.
It may simply be that he's heard from others who do run public companies how much it sucks. It dramatically changes how you run things, and you wouldn't want to be CEO of a public company. He knows that much at least.
There may be other reasons as you say, certainly having to deal with the scrutiny would not be fun, no matter how above board you may be (or likely not).
I don't use FB either (although I do have an account).
However, my kids use it all the time and it's a vital part of their social life. I can sort of understand the valuation of FB - the people who use it regularly really depend on it and in a way that is much stickier than things like Google search.
The only thing that I can see that might hurt FB is if it becomes too popular and there is a mass switch by the "cool" people to use some other service - given that it is based on socializing rather than hard features this could well happen. However, I don't see any risk of this at the moment.
The future of Facebook is not targeting you on 'a social network', its opening up an ad-sense competitor and targeting you on any website - with your personal information. The like and connect buttons are just the first step.
With that in mind it sounds like a good deal to me.
So why would people want to be Facebook users? What value are they getting besides targeted ads?
I find it amusing to see people trying to imagine theoretical ways Facebook could earn income to justify their insane valuation. It is essentially the very definition of speculation. A prudent investor wouldn't touch that shit with a ten foot pole.
So why would people want to be Facebook users? What value are they getting besides targeted ads?
Erm... people like talking and interacting with their friends, and facebook makes that extremely easy?
Ways it could make money in the future - since it could act as the online identity of a substantial portion of internet users, and gets the attention of a significant portion of those daily or weekly, there are a hell of a lot of ways.
If the noise gets unbearable, people will stop interacting on Facebook.
E.g. every time I login I'm seeing lots of invites for stupid games and lots of my friends taking stupid quizzes/tests (like, "what does your birth month make you?", or other stupid shit like that).
I've blocked as many apps as I could, I even deleted people from the friends list ... but it doesn't help, as the noise keeps getting more unbearable every day (no, I don't care about what my friends ate for breakfast).
The only time I found Facebook useful was when I contacted a friend who changed his phone number. But that's about it in 2 years since I've had the account.
I'm near the low end of login frequency, probably, but it's usually the go-to place to organize parties and share photos. People also seem to like its messaging quite a bit.
The notifications are pretty easy to ignore nowadays, but my friends don't seem to be playing Farmville/Mafia Wars as much as they used to.
I was an early adopter of Facebook back in the day it was only open to a handful of school (VERY early 2004). It was nice and exciting and whatnot. But I've lost interest in it completely. I speculate that it's only newcomers that find it interesting. I now use FB only as a means of sending someone a quick note, getting invitations to events (a la evite -- remember that?), or maybe looking up a picture I was tagged in by a friend. If back in the day people put in their hobbies, activities, interests, and list of classes (yup, that was available. Great stalking tool...!), I find people's profiles completely empty.
Anybody with a different experience? Do you ACTUALLY use FB, or are you only drawn to it because of the reasons I outlined above?
Please note that I'm not hating on FB. They do what they do well. Just sharing my experience (and at this point, I will never ever be able to get a job at FB... ;-) ).
Yes. It probably helps that my family, and my wife's family, are all several thousand miles away and we just had our first child. We spend a lot of time on both FB and Skype, keeping everyone up to date.
Integration of photos, videos and messaging is definitely useful, as is the fact that all of our relatives have actually heard of facebook as opposed to twitter ;)
I guess the other consideration is that facebook at least has some semblance of privacy, which is reassuring when posting photos and videos of someone too young to consent (or talk, for that matter).
Thank you for your remark in the second paragraph. I was beginning to think that I'm the only person on this planet concerned by all these "cute" baby pictures being posted publicly.
Pictures which the person on it will likely be really ashamed of in a few years.
Even though babies might look cute and you kinda might have "created" them, they are real people, not pets or lifeless objects.
The same as you can't post pictures of a random person without their consent, you really shouldn't post pictures of your child. Leave the posting of their baby pictures to them, once they are old enough.
Photo Tagging and the News Feed are possibly facebooks two greatest inventions.
They also have: 2 way relationships, some measure of privacy, simplicity of use, Integrated Chat/Messaging, ubiquity, inertia
GS has sustained its business over 140 years, consistently making a lot of money. (Also we recently found they are now, in effect, insured by the US government in a way FB can only dream of)
Reason #3 shows that the author does not understand even the basics of virtual goods and facebook platform monetization. The other points are nearly as non-sensical.
I'll take a crack at it. Here the author seems to be claiming that to remain popular and grow, Zynga and other Facebook-platform-users will need to have razor thin profit margins like Walmart in order to reach as many people with the lowest-common-denominator:
But here's the disconnect: if Facebook's future success depends on aiming for the lowest common denominator with the most people possible, that implies pretty slim margins a la Wal-Mart. You think they're going to justify a $50 billion market capitalization through banner ads? Are you kidding me?
How does selling virtual goods - which are all profit - relate at all to selling actual physical goods to consumers? Walmart drives the price down on what it sells based on it's huge presence in the market. This analogy barely makes any sense, and I have no idea what banner ads have to do with the comparison.
Frankly I would say that Reason #3 reveals that the author has a hard time making an argument in a concise or clear way.
He's clearly talking about the software and not the "virtual goods". Zynga's games require all the engineering expertise required from WalMart's 2.99 gallon jars of pickles. Any other company that can deliver pickles in an acceptable way can get right into that market. By contrast, try making a WoW or Call of Duty clone. Huge, huge undertakings.
If you don't believe me, actually play some of Zynga's games. 50 percent of the random shit on Kongregate is better by far. The difference is marketing only.
Eh. Zynga is social games at scale. The engineering talent isn't in the games part, it's in the scale part. Getting to that scale isn't any easy feat either.
What you've basically just said is that any idiot could clone facebook. Yes, they could. Except they still have everything to do.
Any idiot can clone Facebook, getting users to use Facebook was the hard part.
Scaling is vastly overrated. Yes it requires knowledge, but (a) you don't have to do it from the start (unless you're Blizzard and everything you do is an instant hit) and (b) users don't fucking care about your infrastructure that scales (that's not why they are playing your game).
"The gallon jar reshaped Vlasic's pickle business: It chewed up the profit margin of the business with Wal-Mart, and of pickles generally. Procurement had to scramble to find enough pickles to fill the gallons, but the volume gave Vlasic strong sales numbers, strong growth numbers, and a powerful place in the world of pickles at Wal-Mart. Which accounted for 30% of Vlasic's business. But the company's profits from pickles had shriveled 25% or more, Young says--millions of dollars.
Young remembers begging Wal-Mart for relief. "They said, 'No way,' " says Young. "We said we'll increase the price"--even $3.49 would have helped tremendously--"and they said, 'If you do that, all the other products of yours we buy, we'll stop buying.' It was a clear threat." Hunn recalls things a little differently, if just as ominously: "They said, 'We want the $2.97 gallon of pickles. If you don't do it, we'll see if someone else might.' I knew our competitors were saying to Wal-Mart, 'We'll do the $2.97 gallons if you give us your other business.' " Wal-Mart's business was so indispensable to Vlasic, and the gallon so central to the Wal-Mart relationship, that decisions about the future of the gallon were made at the CEO level.
Finally, Wal-Mart let Vlasic up for air. "The Wal-Mart guy's response was classic," Young recalls. "He said, 'Well, we've done to pickles what we did to orange juice. We've killed it. We can back off.' " Vlasic got to take it down to just over half a gallon of pickles, for $2.79. Not long after that, in January 2001, Vlasic filed for bankruptcy--although the gallon jar of pickles, everyone agrees, wasn't a critical factor."
(Fascinating article over all, well worth the full read.)
So is he saying that he is unsure of the capability and valuation of Facebook based on Zynga's business model?
This point still doesn't make sense in regards to investing in Facebook if he is talking about the product being sold is software rather than virtual goods. One company that uses the platform has an unsustainable (according to the author) business model - therefore the company hosting the platform has a problem as well?
And if the point does make sense, the author is certainly leaving a whole lot of his reasoning and explanation out of the actual article.
There is no reason, in a virtual goods model, that larger audience sizes require thinner margins. Players choose games based on how much fun they are having and what they can play socially with their friends - not the pricing on individual items.
Also, the author states "You think they're going to justify a $50 billion market capitalization through banner ads? Are you kidding me?".
This has nothing to do with Zynga and ignores Facebook Credits, which give Facebook a 30% cut of all the revenue on the platform. I'm pretty sure this author has never heard of them.
"Reason 2 : Goldman has likely earned the lead book runner slot in any initial public offering."
When Microsoft valued Facebook at 15 billion, it was the same thing : they paid 240 million for 1.6% of the company AND running ads on Facebook (while excluding Google) AND some other things we may not know.
But people just said 1.6% for 240 million = 15 billion without taking other parts of the deal into account.
Facebook is very similar to vmware. I expect it would follow a similar path in stock price. Currently vmware is trading at 140 p/e ratio. People are afraid to miss the next Google, Microsoft, etc.. SO they are willing to buy the latest trend. If facebook made $2 a year off 300M users they would have a market cap of 60B with a 100 P/E ratio.
> People are afraid to miss the next Google, Microsoft, etc
Yup, and they don't realize that it's not a winning strategy. Of course I would love to get in on the "ground floor" of the next Microsoft or Intel. Unfortunately it's like trying to get rich by buying enough lottery tickets. Sure one of them is going to be a big winner but the EV of your investment is negative.
> Let's just say for argument's sake that it is early stage investors who are selling. Why would they sell? Because they're in need of cash to invest somewhere else? The way the social network is talked about these days, it's the best investment opportunity in town. So why would anyone want to forsake it?
What a silly argument.
Diversification. Duh.
Even if you've got a hold of what you're certain is the biggest, bestest, most badass-est investment ever that's already gone up 20x, you'd do well to cash out a bit of it and spread that around. On the off chance something crazy happens, you're not up the creek.
I mean, that's not exactly revolutionary right? Diversify? If I owned Facebook equity now, I'd really happily cash some of it in and invest in something as uncorrelated to FB as I possibly could. Like, real estate in Bulgaria or something.
On Zynga: You think they're going to justify a $50 billion market capitalization through banner ads?
These games actually do really well, not from banner ads but from virtual currency. Now that FB is pushing devs to use FB credits, they should be in for a healthy cut of the action.
Games like Farmville are a fad, like Rubix cube and Cabbage Patch Kids. That's not to say that casual games won't continue to an important segment of gaming, just that they will not provide an income stream that justifies a 50 billion company valuation. If it wasn't for the fact that "the market can stay irrational longer than you can stay solvent", I would short a Facebook IPO in a heartbeat.
Facebook's core value is that (nearly) everyone is on it and it is considered to be "cool". The cool aspect will not last. I'd be amused to hear any arguments as to how it possibly can. Young people will move on to something else.
I also think it's very likely that their power as a centralized manager of personal contacts will be eroded over time. Really, it's not that hard of a problem and some other applications will end up being compelling enough for people to switch. They will try to prevent it (e.g. like trying to prevent GMail from exporting email addresses) but ultimately will fail.
The history of the Internet is filled with the corpses of technologies that were supposed to be "the future". Who remembers PointCast? How about Orkut? For a while RSS was touted as the solution to all of mankind's problems. ;-)
If these guys precipitate a bubble burst we should all hate them.
2011 is the year Facebook growth (users, hours, page views, pick one) plateaus, it is inevitable it will happen as some point, and this is very likely the year.
we shouldn't, really. I mean, they practically /made/ the bubble, and I think we've all profited from that, even those of us who don't work for google. Demand for webapp dudes (and infrastructure) is way up because of this bubble. Hell, my own biggest account does some kind of facebook app thing.
Nobody has mentioned acquisition. I think it is safe to say that MSFT would be interested in FB at 50B. 100B starts to look like real money and it is hard to know who would be interested...
1. because this article is on CNN and our formula for getting visitors is to find a popular current event and take a controversial or contrary point of view on it.
Contrast this to FB. They are actually cozying up to Wall Street rather than eschewing them. "Don't be evil" was replaced with a series of privacy gaffes, a flurry of lawsuits surrounding the company's founding, and a CEO who has called early users dumb fucks. It's sad to see how Google's pioneering isn't being emulated by the next big tech company.