Tim Longhurst's Blog

Is Facebook the new Big Mac? The $100 billion dollar question

May 18th, 2012 · 4 Comments

Facebook’s a great place for us to burn time, but might it also be a great place to make money? This week the company lists at a price that values Facebook as worth more than, for example, restaurant chain McDonalds or global miner, BHP.

While we don’t offer financial advice at this site, here are few pro’s and con’s to consider as people around us decide whether they’re going to buy into the business. These are 5 things that will get you thinking – and at the very least, help you sound smart at social functions.

PRO 1) Facebook is a media empire with free labour.
It’s the writing, photos, videos and check-ins of 900 million users that constitute the ‘crack’ that makes Facebook worth coming back to. An expectation that users will keep giving Facebook content for nothing is a big part of what’s being sold here. Interesting to think of us as millions of freelance writers/photographers who work for free. By comparison, Rupert Murdoch pays his journo’s and photographers, but his business is valued at less than half Facebook’s $104 billion pricetag.

PRO 2) There are lots of opportunities for Facebook to cash in on users.
From the obvious (more ads) to the more outlandish (Facebook becomes a financial institution and starts selling us tailored loans, credit cards and insurance – imagine going delinquent on a loan and losing Facebook access as a punishment!). Tricky bit – somehow they’ve got to squeeze a lot more money out of us without ruining the ‘experience’.

CON 1) Facebook’s listing price is asking investors to bet that the business is going to make a LOT more money in the future than they are today.
The listing price of Facebook values the company at about $100 per user. Right now Facebook is making only a little bit of cash per user – about $5 per year from each one of us. They’re going to need to make a lot more than that to justify such a huge sale price.

CON 2) Facebook users are loyal to each other, not the website! If Facebook wants loyalty, they should buy a dog.
People are loyal to each other – not a communication platform. For many people, Facebook has been their first foray into social networking, but I doubt it’ll be their last. Some might find it hard to imagine abandoning the service, but when your friends move on, you learn to stop showing up pretty quickly. (Citation: AOL, MySpace, Hotmail, Yahoo…). When it comes to staying connected, as better options come along, users switch… It might feel like it’s different for Facebook, but that’s a bet against history.

Difference between Facebook and Google? Google made ten times more than Facebook last year.
Google is valued by the market at about $200bn and last year made about $38bn. By comparison, Facebook made a tenth of that. So to break that down into rough numbers… At today’s prices, if you had a dollar of stock in both Facebook and Google, here’s how your investment performed last year:
Facebook: 3.7¢ revenue. Profit/loss unknown.
Google: 19¢ revenue. 6¢ profit.
So it’s Facebook’s revenue potential that investors are being sold, not the current reality…

Finally, Facebook missed a huge opportunity by choosing not to sell stock to each user of the service. Sure the parcels would have been small for many users, but imagine the loyalty Facebook would have achieved if a significant proportion of their customers were also their shareholders.

So what do you see as the future for Facebook? Are you buying in? Sitting on the sidelines? Let us know your take in the comments!

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Category: Communication and connection


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