Tuesday, July 12, 2011

Why Facebook is Worth Much Less than $100 per User

One of the perils of being a very part-time (read: occasional) blogger is that you have lots of ideas that you don't have time to write about.  One of my long-held views about "social networking" and Facebook in particular is that it is a fad, and will have much less long term impact than people believe.

I have always believed that as soon as it went mainstream, it's attractiveness to the people who sustain such networks - the young - would evaporate.  Youth are the core of any such network, because it is they who adopt new technologies and who invest lots of effort in these kinds of elaborate displays of self-identification and expression, and that once the adults started to invade the party, the cool kids would find somewhere else to decamp.

It turns out that someone in Forbes has written an article that encapsulates my views on the whole exercise: that Facebook's early success was it's exclusivity for youth.  When it was launched, it was a platform for communicating with other youth, shielded from the prying (spying) eyes of mom and dad.  Now at over 600 million users, the growth is in the older age segments - grandparents looking to keep track of the grandkids, maternity leave moms - desperate for communication beyond gurgling noises - posting the endless photos of their kids and people long out of school trying to stay in touch or to reconnect with their classmates.

In short, Facebook is losing it's cool - and with it, it's teen users.

This doesn't mean that it cannot make money, or that it cannot remain a good business, provided it can maintain it's position as the leader in sharing for the older set (who, after all, have larger wallets).  The problem is, it is hard to maintain leadership at the forefront of technology if your users are late-adopters.  Even if you push them into using new features, you lose that core group of innovative users who see unexpected, but important ways of using feature sets and who ultimately become the arbiters of what features become dominant.

If it loses it's edge in technology, it has little choice but to become a fast-follower.  This might be a better position, in some sense, but it means that Facebook may also lose the talent war.  It also risks having someone else do to it what it did to myspace.

For investors, what it means is that one has to apply a very substantial discount rate (at least 25%) to the earnings of the business (if it has any), because one must assume a much less than infinite duration of revenue.  Even if revenue can grow by 50% per year for the next five years, and earnings presumably faster, the present value of those earnings is less than 30% of its nominal value.

Ironically, by the time Facebook reaches IPO it may already be in decline.  At this point in it's lifecycle, MySapce began experiencing a terminal revenue decline.  Admittedly, becoming acquired by a big corporation did not help, but it seems ironic that the most enduring legacy of the site is Lily Allen, which only goes to suggest that Zynga might be the big winner in all this (and of course, the investment banks).

But what do I know, I am just a part-time blogger who doesn't get it anyway.  While I like technology and can develop MS Access databases and for the record, I do have a Facebook account, I am not a big gadget collector.  I have been called a Luddite by friends who are more technophilic).  It is why I like to invest in companies that sell toothpaste and hair dryers.

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