Facebook IPO: Boom or bubble?

Is Facebook hugely overvalued or a solid business with some reliable growth ahead of it? A great deal of both. The reason the Facebook flotation is different from yourfunny.co.ck, or anything conceived by a Shoreditch "leisure startup", is that it already has a large and devoted audience. When you can reliably draw a large …

[ItsNotMe]

You're not really serious...are you?

"...in-app purchases made in virtual currencies. Games operator Zynga, famous for Farmville, contributed 12 per cent of Facebook's revenues last year."

12% of their "revenue" is VIRTUAL? So I guess Farcebook can turn a "virtual profit" anytime they want then. What a crock!

[Bakunin]

Having never played Farmville, I assume Facebook take a cut of any real world payments for in games content (the whole Freemium business model).

[5.antiago]

There's real money behind virtual money

Virtual currency costs real money to buy, right?

[James Micallef]

all money is virtual

the only difference between them is in the amount of people who accept that money. Using € or £ to buy Farmville virtual dollars that can only be spent in Farmville is no different to using € or £ to buy Outer Mongolian <whatever> that can only be spent in Outer Mongolia.

So for FB that's real money rolling in for doping nothing more than allowing Zynga to operate games on their platform.

[Anonymous Coward]

quite right

In times of relative prosperity the definitio of what constitutes "money" becomes quite loose. In times of austerity it becomes much tighter (eg. gold or goods).

This has implications for the robustness of the FB business model.

[Richard 120]

The money is real

The money comes from the purchase of virtual items with real money.

Zynga is a top provider of freemium games. If you're not sure what freemium is then google will help.

I'm not entirely sure that their valuation is based entirely on genuine currency though.

Zynga valued at roughly $7bn, from what I can gather FB take a 30% cut (the Apple model) of transactions made on the site, so 30% of what Zynga makes is 12% of what FB makes.

If you go with the simplest of maths and use some poor logic still favouring facebook two and a half times the valuation of Zynga, roughly a fifth of the $100bn valuation.

I don't trade, but I have been on facebook and got bored of Zynga games so I find it interesting that they come up with these astronomical numbers.

I'm guessing the rest of the revenue comes from other freemium games, advertising and probably some "goodwill" which from what I can gather is a proper "virtual money"

[Anonymous Coward]

FWIW: as a FV player, i've looked at the cost in real US$$ compared to FV$$ for what you get... at this time, the rate is 5-6 FV$$ per real US$$... that's if you are buying FV$$ online or via zynga gift cards...

needless to say, i was and still am rather disappointed at the "exchange rate"... especially when it comes to attempting to acquire some game items... at least one item i was looking at turned out to be ~40US$ and that's much too much for an effin' game, thankyouverymuch :(

[Paul RND*1000]

And how do you think you obtain that virtual currency?

Check your local grocery store's gift cards display. Good luck leaving with $10* of Farmville virtual currency without handing over actual real world currency first.

[itzman]

wher is the click through ad model going, though?

What ought to concern me,(but actually I don't give a XXXX) is whether a model that is predicated on

- large amounts of net disposable income staying in the hands of the great unwashed (all the evidence is that the only people that will be left with money to spend shortly will be the super rich, and the odd bankster, and a few people who work in IT).

- the efficacy of cluttering up websites with links to products that at least the people in IT will instantly block with one of the various tools available to those who don't just sit transfixed by Apple or Microsoft's latest 'user experience' ...

...is actually a sound business model at all, these days.

It all seems a bit like opening a store where banksies latest graffiti has been painted, on the basis that lots of people will stop to look at it.

may be so, but what sort of people are they, and did they come with credit cards or half bricks.

No, I wont be investing.

[Code Monkey]

El Reg's readers might block FB's ads. The majority of users don't.

Not arguing they're worth this ludicrous valuation but their business model isn't complete arsewater.

[btrower]

Yes you will be investing

You may not buy the shares, but you are headed to facebook and you will invest things of value.

Invest.

[dotdavid]

MySpace

I just can't help but think of MySpace whenever I think of Facebook.

[Paul RND*1000]

MySpace was an ugly disaster of a user interface, cluttered and unusable. Facebook, by contrast, have...oh, wait. Timeline. Never mind...

[Dani Eder]

MySpace -> Facebook -> ?

@dotdavid - Good point. It's a website, people can move on to another one. When young new companies go public, it's because they need cash to expand. Facebook already serves 40% of the entire internet with the equipment is has now, so it does not need money to expand. Instead, I think it's owners figure it has peaked, so time to cash out before the fall.

[Youngone]

Can you say scam?

I'm sure you're right, but the real tipoff is the $450 million Goldman Sachs invested in FB. I understand that values FB at $50 billion, which on the face of it seems like nonsense.

However, Goldman Sachs would be one of the most efficient vehicles on the planet for seperating fools and money, so who knows how high the price will go?

Yes, I know GS have had some problems with the FB IPO recently, just don't underestimate their ability to hype whatever they are selling.

[Charles Manning]

GS is not an endorsement

All GS care about is that think they will be able to turn a profit from their investment. ie. they will be able to find someone that will buy for more than they paid.

It could mean that GS thinks FB has a rock solid business plan and that FB "value" is based on fundamental asset values.

It could equally mean that GS thinks that there are bigger suckers (or greedier people) out there that will buy from them.

[Mark 65]

"It could mean that GS thinks FB has a rock solid business plan and that FB "value" is based on fundamental asset values.

It could equally mean that GS thinks that there are bigger suckers (or greedier people) out there that will buy from them."

I believe that all their trades rely on the latter.

[Josco]

I don't understand.

As the sage of Omaha remarked some time ago: "I don't invest in anything I don't understand"

I don't understand 'in-app purchases made in virtual currencies' contributing real money.

My real money will stay put.

[Big O]

I originally assumed it was one of those things where you buy the virtual currency with real money. The comments are making me question this now.

[Anonymous Coward]

in relation to the zynga games, it is possible to earn their virtual $$$ without spending any real world $$$... you gain X zynga $$$ for each level you advance ;)

[Yag]

Real money?

Do you speak about the few bytes in your bank's computers?

Or even banknotes under your matress?

Or even shiny and useless metals?

There's no such thing as "real" and "fake" money - Zimbabwe dollar may be state-sanctionned money, i'ld take Zinga toy-money instead.

[g e]

And how do they measure 'time on site' per user?

I have an FB window open all the time. In a different tab to the one I'm actually USING.

If they measure visiting time on site by their timer fetching background updates then those figures are heavily fraudulent because the lights are indeed on but the curtains are resolutely drawn.

[Philip Lewis]

zakly

Yes, that is precisely my thought. And what about my iPhone APP? How is that measured?

Metrics for which a precise definition is not supplied are worthless. If FB's value is based on these metrics, then I must conclude the company is worthless.

I have always assumed FB (and Google) were secretly logging my every action unless I logged out. I have some FF add-on protections, and I use trackmenot as well to obfuscate my true nature.

Philip

[Dr Dan Holdsworth]

The law is the rub here.

At the moment, Facebook has a justified reputation for being an avid collector of any and all personal data it can lay its grubby little hands on, but at the moment it isn't doing very much with all this data. If at some point in the future (like, say, when shareholders can twist one arm behind its back and demand it maximise financial output) it decides to use this data fairly aggressively, then there is a near-certainty that legislators are going to retaliate and very aggressively enforce their citizens' right to privacy whether the citizens want it or not.

The likeliest candidate for this sort of approach is the EU, which has a known propensity for never letting gibbering idiocy, complete ignorance of what it is doing or any shade of legal competency get in the way of enacting laws on things.

The second likeliest candidate for jumping all over Facebook is none other than the USA, which is already showing quite a few jackboot tendencies, what with the Patriot Act and the recently promulgated SOPA act. No doubt similar pieces of legislation will be in the pipeline, ostensibly targeted at terrorists but mostly used on local citizens.

In short, Facebook looks valuable on paper just at the moment. The shares will likely jump a bit post-IPO, then its anyone's guess. Look at what happened to the likes of Bebo and Myspace; social networking sites can and do crash and burn with astonishing speed for the most trivial of reasons. Caution advised here.

[5.antiago]

"when shareholders can twist one arm behind its back and demand it maximise financial output"

This little sentence here perfectly describes why shareholder capitalism is a morally bankrupt system.

"...the most trivial of reasons"

For example, being aggressively "monetised" to the extent that the original point of the site is lost, and becomes less fun to visit

[Paul RND*1000]

@5.antiago

You end up running your company for the benefit of the shareholders.

Any customer satisfaction achieved is merely an accidental side effect of this behavior.

[JimC]

> customer satisfaction a side effect

Not so. If a company doesn't achieve a balance between the needs and desires of shareholders, customers and staff it will fail, because it needs all three to be content to stay in business.

[TheOtherHobbbes]

Historically

this has never been an issue.

See e.g. Microsoft which did quite nicely while ignoring user rage.

On Planet Capitalism you get revenue by marketing the crap out of mediocrity and/or by sending the lawyers in, not by being genuinely awesome and superb to the point where you're fluffing your customers until they squee.

FaceBorg has a lot of potential. It has so much potential it has no idea what to do with it.

Customer satisfaction likely won't play a huge role in future plans - no more than it does today, anyway.

[the-it-slayer]

Looks like Zuckerbong needs advice...

Are going to call him and advice of this very quality information?

I'd like to put my money on Facebook dying within the next 2 years. Some scandel or new social-media fang-dang-thing will take over to make millions cancel their accounts everyday. Twitter will then be over the moon as it takes the social update lime-light.

Beer?

[Drew V.]

"If it decides to use this data fairly aggressively, then there is a near-certainty that legislators are going to retaliate and very aggressively enforce their citizens' right to privacy whether the citizens want it or not."

I like how you're implying that when FB starts to use data very aggressively, people themselves are just going let that happen and bend over for FB. You think people are just sheep, don't you?

Caution advised: low opinion of humanity.

[Anonymous Coward]

exactly! one of the things that i look at is how many try to do something with advertisements... well, lemme tell ya, world, i hate ads on TV and in all kinds of media... as such i specifically block ALL ads from arriving (or even being requested in many cases) on my systems...

IF i want something, THEN i'll go looking for it... other than that, if you try to shove your warez in my face, you can forget about seeing me any more 'cause i DEFINITELY will not be darkening your doorstep...

on the other hand, if i have something you are interested in, ask me about it... if you think i might be able to acquire something you are interested in, ask me about it... in other words, i will NOT be cold calling you nor will i be rushing over you trying to sell you what i think you want... i'm not a "used car salesman" and i never will be... in my world, eskioms do not buy ice from any sales persons... they go get it themselves ;)

[Rovindi]

mmm...

Damn fine article. Well written and well balanced. Good Journalism.

That`s why I like El Reg.

Keep it coming...

[Donald Miller]

Minutes per user

So 20 minutes per user per day (not even trying to calculate users such as g e) is their business plan? I probably spend more time than that reading The Register®, but I also have it open in a tab ~24/7 without looking at it much more than that 20 mpd. My budget is about $5000 per month, and I've never been to Fecesbook. I wonder what ebay's mpu is?

[fireman sam]

Here's my prediction... FB will launch on IPO and quickly gather close to the $100bn valuation they're looking for.

Soon after the initial furore settles, you'll see a large drop in share price, probably about 35%. Still massive for a company who doesn't sell anything and who's only source of revenue disappears with Ad Block Plus, unless you're the sort that likes spending real money for in-game items.

Compare to a valuation for AMD, one of the largest chip manufacturers in the world, at about $6bn and those numbers look a little crazy (or ARM at $13bn which is probably overvalued in itself).

[John A Blackley]

Overheard

on the radio this morning, one financial analyst reckoning that, in order to justify its IPO price, FB will need to accumulate one quarter of the entire world's advertising revenue (in all media) over the next five years.

Shorting FB shares might make some money.

[A Marsh]

Only you can't short the shares, because they're not free-floating - i.e. you can only buy if you know the right people, so there's none to borrow.

Great article here on it too http://ftalphaville.ft.com/blog/2012/02/01/864331/become-facebooks-friend/

Which includes a number of risks:

"If we fail to retain existing users or add new users, or if our users decrease their level of engagement with Facebook, our revenue, financial results, and business may be significantly harmed."

"Our financial performance has been and will continue to be significantly determined by our success in adding, retaining, and engaging active users. We anticipate that our active user growth rate will decline over time..."

[Anonymous Coward]

while this shorting futures might be possible, i personally view it as highly unethical and one of the basic reasons why the world's economy is in the cr4pper that it is in... remember, it is these speculators that caused the euro mess that is floundering now... especially when one looks at the fact that countries like greece were not able to get "loans" and then when they joined the euroscape they were... until someone decided to look at them as an independent country again instead of as a euroscape member...

[EddieD]

Erm...

does it allow for the dweebs like me who open facebook tab when they log in at work (yeah, okay...I'm weak), and leave it like that all day?

I maybe interact with it for 5 mins, but it would appear that I'm logged in for 540 mins..

[Local Group]

@ Erm

While I am not a great user of FB, I have always felt that it's not the number of minutes you spend there, it's the number of different pages you navigate to while there that FB advertisers look at.

[Mark 65]

But surely they are attributing a time allowed for reading that page and I think that is the problem - they did not disclose any methodology.

[Local Group]

@ Mark 65

Promoting your product or service on the internet is still the 'mystery meat' of advertising.

The CPM to advertise in a newspaper, magazine and television or billboards on the highway, subway car or soccer match has been established and is a helpful tool for the media buyer.

How many readers click onto a page with your ad is the best way to determine how much to pay for that advertisement.

Does anyone know if there's a difference in receptivity to your ads between a reader turning the pages of a newspaper or clicking through pages on the web?

Perhaps it's not a question that the methodology is not disclosed. It simply may not known.

[Andrew Moore]

The writing is on the wall...

My 10 year old daughter described someone yesterday as being 'so lame, she has a Facebook page'.

Zuck better sell those shares of his sooner rather than later...

[5.antiago]

Nice!

Haha! Really? That's funny

It's not that I'm *massively* anti-FB, just that it seems so obvious that websites like this will simply go out of fashion. Being cool builds the crowds, the crowds make it mainstream, mainstream makes it uncool.

Just so long as we don't have to bail out any investment banks that buy FB shares

[Just Thinking]

"Being cool builds the crowds, the crowds make it mainstream, mainstream makes it uncool."

But by the time you are mainstream, you don't need to be cool anymore.

I used to like U2 back in the early days when they were briefly cool. Went off them when they got more popular and their music went off the boil a bit (as well as turning into a bunch of ...)

I doubt that they miss me.

[Andrew Moore]

Well, they did go seriously downhill right about Zooropa

[Ian 16]

uncool

I'm sure myspace would rather not be 'uncool'

=P

[Uncle Slacky]

Same here

My younger daughter (13) hasn't bothered to join - she texts her immediate friends anyway, and she corresponds with the more remote ones by email. Elder daughter is on FB but has been keener on G+ on late. Her presence on both is mainly in order to plug her own self-built website & merchandise, however.

[EddieD]

Similar here - my 13 and 18 year old nieces have practically abandonded Facebook in favour of BBM - which might explain the Q4 surge in blackberry shipments in the UK

[John I'm only dancing]

Alchemist

Looks like they might actually achieve turning manure into gold...well lining Suckerbug's pockets anyway.

[Graham Marsden]

To paraphrase the Hitch Hiker's Guide...

"If it comes to a choice between spending ten billion dollars finding that out that the entire internet is being run by a bunch of maniacs, and on the other hand just taking the money and running, then I for one could do with the exercise!"