Has Facebook taken Microsoft for a ride?

The Microsoft investment of $240 million to pick up a 1.6% stake in Facebook has attracted significant media attention. The investment obviously puts Facebook valuation at a whopping $15 billion. Let us take a look at some hard, cold facts to analyze the merits of the investment.

1. A Wall Street Journal (Online) report has indicated that Facebook expects to breakeven in 2007 with revenues of $150 million. The Journal also estimates Facebook’s 2007 earnings at $30 million. That equates the Facebook valuation (of $15 billion) at 500 times estimated earnings. Google in comparison is trading at $707 (Oct. 31, 2007) for a market capitalization of $164.66 billion giving it a value multiple of 49.33 (on earnings of $3.3375 billion) – less than 1/10th the valuation multiple of the Microsoft investment in Facebook.
2. If the same “100X multiple” on revenue were used on Wal-Mart Stores, the largest 2007 Fortune 500 company in America would have a market capitalization of $35.1 trillion – almost 3 times the GDP of US.
3. Facebook is believed to have more than 50 million users worldwide. Thus, their value works out to $300 per user. It can be estimated that with its Sept. 2007 global search engine market share of almost 57% (per HitsLink statistics), Google has almost 710 million users worldwide (taking Sept. 2007 Internet World Stats estimate of Internet users into account). At $300 per user, Google should have a market cap of almost $215 billion, which is 30% more than what Google’s current market cap is. And, oh, by the way that would take Google to a share price of almost $1000.
4. Valleywag reports click-through rates on Facebook are astonishingly low at 0.04% (Myspace is 0.10%). This probably is a clear indication of lower disposable incomes of Facebook’s user base. Further, taking comScore Sept. 2007 statistics into account, Facebook generates about 6.0 million ad clicks per month. In comparison, MySpace generates about 45.0 million ad clicks per month. MySpace revenue has been estimated at $525 million for 2007 or roughly at $1 per click per year. The corresponding figure for Facebook is $2 per click per year.
5. According to market research firm Parks Associates, few U.S. consumers are willing to pay a monthly fee to use social networking sites. This online survey of Internet users found 72% of social networking users would stop using a site if required to pay a $2 monthly fee. Likewise, nearly 40% would stop if a site contains too many advertisements. Clearly, Microsoft must have seen value in Facebook’s potential to generate ad revenues and NOT subscription revenues.

Facebook’s monthly burn rate must be in the vicinity of about $15 million. If it has indeed broken even, the Microsoft investment is just insurance money - something that reassures Facebook about its future. Thus, it really does not make a whole lot of sense why Facebook is supposedly thinking of raising additional capital from hedge funds. Do we know all that we need to know about what is going on within Facebook? Why would anyone value Facebook so high?

The Microsoft investment is clearly a bet by Microsoft – a “leap of faith” if you will. Microsoft is banking on the fact that eventually Facebook would be a better destination for online advertisers. Microsoft clearly thinks that unlike Google, Facebook knows a lot about its users, their profiles, hobbies, interests, activities and so on. This helps advertisers run targeted campaigns more effectively. On the contrary, Google does not know any of this information. Thus, Microsoft is hoping that Facebook with help them become a serious player in the growing market of "social advertising".

How will profile searches impact Facebook?

Facebook recently announced:

“Starting today, we are making limited public search listings available to people who are not logged in to Facebook. We're expanding search so that people can see which of their friends are on Facebook more easily. The public search listing contains less information than someone could find right after signing up anyway, so we're not exposing any new information, and you have complete control over your public search listing.”

The decision (as announced) at face value is aimed at letting people search for friends who are on Facebook. It appears to be a logical enhancement of Facebook functionality. But, the ability to search for friends has always been available to registered users. Any user seriously interested in connecting with friends would not mind registering on Facebook at all.

So, why this sudden change of policy permitting (unregistered) users not logged in to search users. What are the other implications of this decision? I have a simple (but, speculative) explanation for this decision.

A recent Online Publishers Association report clearly indicates trends in Internet traffic. The report has shown online traffic to be shifting away from commerce and communications sites to social networking and media sites. Further, users on social networking and media sites spend time viewing other users’ profiles to leverage the possibility of connecting with other users who share interests.

Thus, the opportunity to increase page views might have prompted Facebook into offering the public search listing feature. The objective very well might have been to improve stickiness. Another reason could be to increase conversions. Afterall, a casual visitor is more likely to register if he or she finds another friend or buddy to be a user of Facebook and wants to connect with that person.

So, Facebook seems to have taken a leaf out of the MySpace book. Needless to say this is a step in the right direction. The functionality should have been made available a long time ago.

The decision clearly indicates Facebook is no longer a niche social networking site focusing on the student community, but a mainstream player. It is definitely going to be interesting to watch the “social networking showdown” between MySpace and Facebook over the next few months.

New Media Differentiators

Robert Scoble in his "What is social media?" post explains “new, social, emergent media” nicely. It also sums up the salient aspects of social media by comparing it with “old, traditional media”.

Summarizing the distinguishing attributes of new media as compared to “old media” such as print media (e.g., newspapers, magazines, catalogs, paper mail, books), broadcast media (e.g., television & radio programs), digital media (e.g., CDs, DVDs, mini discs), Robert pointed out the following (I am rephrasing these points just to give a more personal touch to this post):

1. Old media once made public cannot be modified. For instance, the songs in a released CD cannot be changed.
   
2. Old media are mostly one-way communication channels that don’t let consumers interact with the producers of the media. For example, readers of blogs can leave behind their comments. In this regard, broadcast media is an exception since some programs do indeed permit listeners to call in and interact with the programming.
   
3. Social media lets consumers rate, remark, review and recommend stuff in almost real time. Other consumers can get a sense of the quality and / or popularity of the media item. On the contrary, old media gives consumers no idea of quality or popularity of any item until much later (e.g., a best seller list or Nielsen TV ratings).
   
4. With “new media” it is much easier to search archives and locate related content. New media also permits manipulation of material in ways that are just not possible with older media. Searching and locating related material in case of traditional media is relatively more difficult.
   
5. New media makes it possible to mix and match media types. For instance, you can have a video clip or a bunch of photos published with your web log.
   
6. New media imposes few or no editorial restrictions on the duration of broadcast or length of a publication. There is also greater freedom with topic selection and quality of production. For instance, one can publish a 20-page article on the Web or 100 articles on a given topic.
   
7. Social media also allows easy reuse, repurposing and republishing of material. For instance, I have linked to Robert Scoble’s post here and am adding my two-bit to it. Such reference to another article might be equally possible in a magazine. But, the difference is that the reader cannot quickly check the original article with the same degree of ease. Further, new media can be syndicated with great ease. I could have subscribed to Scoble’s posts through an RSS feed and republished them elsewhere.
   
8. New media can be combined or mashed up with other data served by other applications. For example, the publisher of a blog has no control over the advertisements Google serves or the stuff that get displayed in a widget. Such media aggregation is just not possible with traditional media.
   

Besides the above characteristics Scoble listed, here is a few more:

1. Social media has no constraints of circulation and distribution. Anyone with Internet connectivity can potentially access any article published practically anywhere in the world not only in real time but also at ANYTIME as well.
   
2. Old media by virtue of having been around for much longer than “new media” has a lot more material available on historical events, literary works and more.
   
3. In some instances, social media also permits the collaborative creation of material. New media can be edited at anytime. In most cases, social media published can even be reversed or retracted. This is next to impossible in most cases in the traditional context.

Facebook: A fortified garden

The Internet world in the valley has been abuzz over the last 3 months about the Facebook (FB) announcement to give “an unprecedented amount of access to developers.” The Facebook API would permit third party developers to offer their applications to FB users. Users can browse through and use any of the third-party applications. They can even remove default FB applications and use third party solutions instead.

Besides letting these applications serve their own ads, Facebook has also added a viral element to this ecosystem. When your friend subscribes to a third-party application, it is included in the news stream of that user. So, when notified about your friend’s choice, you can decide to use the application yourself. In other words, your “social graph” (in FB parlance) – your network of friends – will push information to you.

The Implications
This strategy has been hailed for two reasons. One, it makes FB functionally richer and developers get access to the large FB user base. And two, friends can push you information that you might find useful. But, both these advantages have downsides.

To begin with this information push is fine with small groups. But as your network grows, it soon becomes information overload – often unwanted. It ends up becoming the equivalent of unsolicited mail albeit non-disruptive.

It is true that an open Facebook is unlike other social networks, which attempt to lock in users. The obvious goal here is to make available so much functionality on Facebook that users don’t feel the need to look at other platforms at all. This is very similar to the Microsoft strategy of using third-party application providers to gain competitive advantage.

This to them has been Facebook’s valiant attempt to knock walled gardens.

Is Content Still King?

Dee in her post “Is Content Being Dethroned By Social Media?” said:

“…A well-known Internet marketing slogan is “Content is king.” But is content being dethroned by social media?

Social media sites like Digg, Reddit, Netscape, Del.icio.us, and StumbleUpon are changing the online business game. These sites drive huge amounts of traffic. And all you need is good content and a lot of friends. Notice I did not say great content.

… This brings us to the key to social media marketing. Friends, the more, the merrier…”

Her point was that with popularity of social media (including bookmarking) sites it was relatively easier for online marketers to fetch eyeballs to their websites. Even relatively pedestrian content can be used to generate a ton of “eyeballs”. Obviously she mentioned this in the context of using social media as a marketing channel.

Guest Eyeballs
I agree. You can indeed get a lot of visitors to your site with interesting, or as Dee puts it good, content and a little help from social media sites – Digg, Reddit, Del.icio.us, StumbleUpon, etc. Your traffic sees a growth spike for a few days, maybe weeks. You will love all the attention your site (or more specifically, content - good, bad or ugly) gets.

And, then the audience begins to erode - as swiftly as it arrived. Your content looses its novelty and, more importantly, gets buried under new content (or links) at those social media sites. Thus, the marketing challenge does not end with attracting this “drive-by traffic”, or as I like to call it “guest eyeballs.”

Resident Eyeballs
You are left with the task of getting more eyeballs. The marketing task then truly boils down to not just fetching eyeballs, but also retaining eyeballs. That is, converting your “guest eyeballs” to “resident eyeballs.”

This can only happen if your site offers fresh content (presumably good) that compels your first-time visitors to return. The only way to accomplish this is by having a constant supply of interesting and compelling content to retain your “(guest) eyeball stream”. And, obviously, the rate at which you refresh content becomes crucial. If the rate of refresh is too slow, your site and its content become stale.

Consumption Keystrokes
Besides refreshing, engaging content, marketers use “registration” as another technique for retention. Registration – which entails the use of “keystrokes” – is commonly used as a pre-requisite for receiving additional value. This value can be in the form of additional valuable content delivered one-time (e.g., a white paper), or on a continuous basis (e.g., a newsletter subscription, or RSS). The value offer can even take the form of additional rights accorded to registered users (e.g., right to rate or comment).

The marketing goal here is to generate return traffic – repeatedly and frequently, or in other words, increase devotion to your site. The value for the user is “information consumption.” I refer to return traffic generated through registration (in its many forms) as “consumption keystrokes.” The prime motivation here again is “content” or, better still, “addiction to your site’s content.”

Contribution Keystrokes
The discussions above are predicated on the site supplying content to attract and retain traffic. This means, eventually the supply of quality content will become a bottleneck. So, website owners will progressively find it more difficult to maintain traffic growth.

So, the ultimate marketer’s challenge is to have a self-scaling and self-sustaining model for traffic growth. Is such a scenario possible? Yes, it is possible if your (existing) traffic – that is, user base – generates content that attracts more traffic. This indeed is the secret sauce behind the successful social media sites!

Sites like YouTube, Digg, MySpace, etc. have thrived as a result of user-generated content – or “contribution keystrokes”. User contributions can be in the form of a rating or review of content; or the creation (e.g., uploading a video) of content. That to me is the quintessence of ‘community’ in the online realm – or the ‘democratic web.’ Once again, ‘content’ is the driving force.

Commercial Keystrokes
The end goal of any website is obviously is to generate revenue. Advertising and online commerce remain as the primary revenues models. In either case this will happen only through keystrokes – “commercial keystrokes”.

From a marketing perspective how well you transition eyeballs to keystrokes will determine your success. The more traffic your site generates, the more successful you are likely to be in generating revenues.

And, of course, that hinges upon your site’s ability to scale and sustain the offer of great, engaging, refreshing and compelling content over time. Thus, as you can see, content is not just the king, but the “emperor” of the online world.