To ask is the Facebook IPO worth $100 billion is to ask whether Facebook is a future blue-chip company. And the answer is complicated. Facebook’s 2011 revenue of $3.7 billion — and declining — suggests the price is getting over-hyped. For comparison, Amazon, with a current valuation of $100 billion, had revenues that topped $48 billion last year. But this comparison is not entirely fair. Facebook’s main assets are not consumers, but users. While users do not pay anything to use, nor does Facebook pay the users for all the data they produce. Facebook’s reported 900 million users are remarkably productive, with over 100 billion friend interactions.
The main question with Facebook is not whether it produces revenues. The main question is instead twofold. First, do its users produce good data? Second, can Facebook accurately identify its main clients, that is, the organizations most fully suited to gain from insight gleaned from the data? These questions have not been answered. Facebook bulls and bears need to recognize these questions have not been answered. My best guesses at how these questions will be answered are as follows. First, the data will be found to be good, if limited. They are good in that they (a) provide broad, aggregative understandings of human behavior; and (b) provide opportunities for small businesses to locate more precisely who their audience is, both actually and potentially. Second, Facebook’s most natural clients are (1) institutions whose audiences are populations, for whom aggregative data make sense, like states and state-like corporations; and (2) smaller businesses with budgets to expand data analysis in new ways.
Strengths of Data:
- Aggregative insight into human behavior
- Smaller, contextual understanding of who your audience is
- States and state-like corporations that operate in relation to populations and who can afford to think objectively about audiences with less regard to contextual differences within the population
- Small businesses with the budget to engage in data analysis, who can use Facebook to identify where audiences are, and then directly contact them for in-depth interviews, surveys, focus groups, etc.
In sum, Facebook’s data are good and it has a natural base of clients.
But there are a couple of problematic assumptions. The first assumption is that Facebook users are going to continue to be so productive. Instead, could its users grow tired of Facebook and move on? Yes. Facebook turning into an uncool ghost town is not that radical a proposition. It could happen over night. Do I expect it? Not today.
Finally, there is the question of accounting. In general, how does one account for intangible assets? In Facebook’s case, how does the productivity of its users get accounted for in relation to its lack of consumers and relatively anemic revenues? How the question of accounting for intangibles plays out is at the heart of Facebook’s valuation, now and going forward.