Social Networks: Smoke, Mirrors and Valuation

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I was so shocked -- not -- to find out that most Facebook applications are "just for fun," gaming or sports, according to a Flowing Data study released earlier this year.


I had a similar reaction to finding out that Microsoft's $15 billion valuation of Facebook was (gasp) too high -- though we don't know by how many billions. That non-so-surprising nugget of information came out in a federal judge's decision to dismiss social network ConnectU's claims that Facebook founder Mark Zuckerberg stole ideas and code from ConnectU.


According to a New York Times report, prior to selling Microsoft a stake in the company last year, Facebook's directors came up with an valuation less than the $15 billion mentioned in the press release announcing the deal. How much less? Apparently enough for ConnectU to reconsider its action against Facebook. The site's current valuation was not included in the decision, the Times notes.


After thinking, well d'uh, my thoughts turned to Facebook's actual worth. It's an especially pertinent question, thanks to a new round of funding that puts LinkedIn's worth at $1 billion. The site is totally worth it, says out Ovum analyst Eden Zoller. While it has just 23 million users compared to Facebook's 70 million, it is growing faster than Facebook and other networking sites. More important, it is projecting it will double its revenues in 2008. And perhaps most important, considering the advertising-driven model of networking sites, its members are professionals with an average household income of $109,000.


TechCrunch's Michael Arrington was thinking about Facebook's value too -- even before the decision. While acknowledging it's tough to estimate the value of networking sites because available data is limited largely to aggregate page view and unique visitor numbers, Arrington busts out some numbers that put MySpace's value at anywhere between $3.3 billion and $20 billion. He estimates Facebook is worth between $2.5 billion and $15 billion and Linkedn is worth between $182 million and $1.1 billion. Arrington's formula takes into account, among other things, the average advertising spend for the numbers of people online in countries where these sites have a presence.


An ABC News story also looks at the issue, concluding that none of the sites deliver the kind of value one might expect, considering their user numbers. It gets in a dig (not a digg) at Facebook, referring to its $15 billion valuation as "dubious." Facebook is expected to lose $150 million is cash this year, based on projected EBITDA of $50 million and an expected $200 million in capital expenses. That's a simple valuation of roughly 300x earnings, which means (generously) that speculation is driving that number, or anything close to that number.


Google co-founder Sergey Brin, noting the thus-far disappointing results of its $900 million, three-year advertising deal with MySpace during Google's Q4 2007 earnings call, said:

I don't think we have the killer best way to advertise and monetize social networks yet.

Unlike Google, which has turned its AdWords into a money machine, networking sites don't typically attract users looking for specific information. With AdWords, advertisers pay to get their message out in front of users interested in what they are selling, based on the what they've asked Google to find. Facebook users, in contrast, are likely to find ads irrelevant or annoying. ABC News cites a 2007 media buyer's report indicating that Facebook users click on ads just 0.4 percent of the time -- significantly less than the 2 percent of the time they click on Google ads.


While targeted ads are touted as the way for networking sites to finally generate big bucks, most Internet users appear to find the idea a little too Big-Brotherish. The article recounts Facebook's ill-fated effort at targeted ads, Beacon, which apparently still has about 30 advertisers on board despite a swell of negative publicity and even a lawsuit from a woman incensed that Blockbuster shared her rental habits with her Facebook friends. Thirty is not exactly the number the company had in mind when it launched Beacon, with much fanfare, late last year.


It also mentions MySpace's HyperTargeting system, which scans users' profiles for information about their interests and demographics and then serves ads to them based on that data. According to the president of the Fox Interactive Media Audience Network, "The concept of relevance really resonated with users." These kinds of statements make me crazy, as I wrote back in January:

To me, [targeted ads are] like having an appendectomy. There's no way of avoiding it, but anesthesia makes it less painful. Just don't patronize me by trying to make it sound enjoyable.

Too bad MySpace's "concept of relevance" doesn't yet appear to be making much headway with advertisers. Says Marc Ruxin, director of digital strategy and innovation at the advertising company McCann, which helps large companies craft their advertising campaigns:

We've bought a little bit. It's been OK.