Microsoft’s rumoured interest in a 5% stake of Facebook will reportedly set them back $300m, valuing Facebook at a whopping $5b.
The Times ran an interesting article making a comparison against other companies with a similar net worth, such as British Airways. Facebook makes just 5% of the profit and has a far weaker liquidity (jet planes vs. servers), so it appears to be a pretty wild valuation.
There is little doubt that Facebook’s growth will continue to explode, especially if they finally get around to localising the platform. However, there may be a valid concern that their growth may be limited to just English-speaking countries and across Europe. Norms of social interactions in Asia and the Middle East may be sufficiently different to prevent Facebook from gaining any significant traction. Moreover, competing networks have gained a strong first mover advantage, providing an impregnable barrier of entry for Facebook.
My prior testing with Flyers Pro suggests that whilst the product provides interesting targeting options and a healthy ROI for direct response advertisers, it’s proving hard to scale since their ad auction quickly ditches your campaign in favour of more profitable CPM based ads. I’m skeptical that the simple skyscraper ads will be enough to please brand advertisers, so it’d be my opinion that they really need to experiment with some more innovative advertising solutions to warrant their mammoth price tag. Embedded movie trailers, music streaming, or gadget ads could be a great way for companies to target specific demographics in a completely non-intrusive way. Another interesting option would be to allow advertisers to target ‘social butterflies’; specific people who are core to the social graph – for example, it could be really potent for Levi to give free jeans to a user who’s interested in fashion and has a bunch of friends in the same demographic.
I personally hope that Facebook stays independent and develops a kick-ass advertising product that provides more flexibility to advertisers and real value to users. I’d be quite happy to be sent some freebies or recommended a movie based on my preferences. Time will tell…
Update: The Economist has a superb feature on the looming acquisition and the value of social networks. In a nutshell; Facebook has “large crowds who are communicating without expressing specific interests” (ie. intent). That rules out direct response advertisers, leaving just brand advertisers who’ll only see results if they develop ways for users to interact with the brand via widgets. The resource requirement to this limits the ad inventory pushing up the auction value.
Update #2: Microsoft believes Facebook is actually worth $15b and has acquired a 1.6% stake for $240m. Read more at WSJ.