The Value of Facebook?

Facebook’s IPO is expected sometime today. For the past few days, there have been several pieces written about the pending IPO, who will get lead underwriter, what’s Facebook worth, why it doesn’t matter and other news. Possibly the best coverage has been with Kara Swisher at All Things D (btw, her coverage on pretty much every topic she touches has been awesome. Balanced, detailed, insightful. A lot of tech reporters could learn a lot from reading her pieces). The discussion about the valuation, and in the case of the Forbes piece, the relevance, has me wondering about the real value in Facebook. Kara’s comment on her article today about AOL (which really was “facebook” before Facebook) put more fuel on the fire of “what is Facebook’s value” and whether or not an alternative could arise to supplant them.

Replacing Facebook

Let’s talk about potential successors/replacements/alternatives. The reality is, no company is permanent. No company dominates their industry or place in the market forever. Everyone falls, and some will fail. Empires topple, kings die. It’s the way of the world. The best you can hope for is a reasonably long time in the sun, and to continue to remain a meaningful part of the landscape for a long, long time. But what could replace Facebook? That is the multi-billion dollar question. When looking at trying to supplant them, there are really two barriers to entry that need to be considered. The first, and lowest barrier, is technical: designing, building, deploying and running a scalable web-based service is not as big a deal as it used to be. Yes, there is work involved. Yes, it will take long hours, a few mistakes, and talented people to make it work. But the talent is out there. Moving from a hosted/cloud-based solution to an in-house, fully-owned datacenter is feasible. There are lots of talented and experience people that can take your service from a single instanced hosted by Amazon through to multiple datacenters spanning the globe. Building these types of services isn’t nearly the black art is used to be (although there is still a bit of magic involved. Fortunately, the sorcerers are available for a price).

The far larger barrier is traction: getting people to use your service in large enough numbers to sustain growth, attract advertisers (if you use ads for revenue) and attract others to use your service or platform. Any new entrant would realistically have to position their new service as “in addition to” rather than “instead of” initially. They would need to make it easy for you, and your network of friends and family (and their networks and so on) to start to use it, find more value, and eventually make it “instead of” Facebook. That’s the far bigger challenge, and one that Google+ appears to be struggling with. For all of the talk of “lots of people are moving to it or using it”, I’m not seeing that in my network for people. For now, I use Facebook, Google+ and LinkedIn. I’m seriously considering abandoning Google+. Few of my friends and none of my family are on it. Most don’t want to move, because they’ve got too much invested in Facebook. Moving to Google+ means starting over, rebuilding their network, and finding alternatives to any missing features. The “stickiness” of Facebook, because of the time and effort people have put into building their networks, and their dependence on things like the games, makes supplanting it in a short timeframe nearly impossible. Any attempt to replace them will need to take a longer view, and come at it from a different angle. Google+ is trying head-on, and while it has made some progress, it is still a long, long way from being a viable competitor to Facebook.

But what does this mean for Facebook’s shares, and their impending IPO? It means that, for a few years at least, Facebook has a pretty solid hold on it’s part of the market. It provides them with a degree of stability when it comes to users, advertising and other revenue.

Facebook’s Value

There are some that decry the valuation that is purportedly going to be given to Facebook. Some lament that they don’t “make anything”. There’s nothing physical or tangible with Facebook that you can put your hands on. Others complain about the fact that people could just up and leave. Others point out that Facebook’s overall impact on the Internet from a commerce perspective is actually small (using their supposedly small ad revenue in relation to the overall market).

Yes, Facebook doesn’t make “things”. But neither did Google when it went public. It’s one, tangible piece of work that you can put your hands on, Android, only came out a few short years ago. Before that, Google’s only “thing” was search and advertising. Nothing you could touch, but only something you could see.

Facebook’s value is in a platform that, like television before it, gives companies access to a very, very large pool of potential customers. Unlike television, Facebook allows more of a two-way “conversation” with customers. Granted, Facebook’s place in the universe of conventional advertising is small. But they have also changed the way companies “advertise”. Look at the number of Facebook pages dedicated to companies, or in some cases, specific products. Companies like Ford and GM have used Facebook as the core platform for pre-launch activities for new cars, and made it a central part of the product unveiling. Companies can use it as a means of testing consumer interest (granted, with a somewhat biased audience) for new products, new services or new branding. People don’t have to sit back and passively watch a commercial for a new product. They can read about it, and comment on it, right on Facebook. For companies, the lag between new product release and acceptance (or rejection) can be shorter, because you don’t have to wait a week, a month or a quarter, to get sales results and return rates. If people don’t like the name, the logo or the look, companies can find out about it right away, through Facebook.

The other value of the platform is that it provides a way to deploy “software” without having to worry about media and distribution. Zynga, which recently had its own IPO, has a significant presence on Facebook. I’m not sure a web-based game like Farmville would have succeeded without Facebook as it’s initial (and still primary) platform. The benefits aren’t just for Zynga, though: these games give people a reason to come back to Facebook, spend time on the platform, and explore and find other things to do. Games, polls and quizzes, news are all there, and you can share what you are doing with friends (which brings in more for companies like Zynga). It’s “word of mouth”, but better, because the feedback to your friends can be instantaneous and immediate. You don’t have to call them, e-mail them or talk face to face to spread the news: it shows up on your wall, in your new stream. You tell all of your friends immediately and simultaneously, rather than remembering that you were going to tell them, but a week has gone by, and their phone is busy, so you’ll tell them later, but only if you remember.

Does that make Facebook the reported $10 billion that their IPO is going to be valued at? Does it therefore make the company worth $100 billion (because only 10% of the shares will be floated)? In the short term, probably not. But as a long-term valuation, it isn’t out of reach. As a communication platform, Facebook is very, very powerful. Companies know this, and have changed their approach to “advertising” as a result. People know this, because there are many millions active every day. Consider how much value was put on a company whose only real claims were as a search engine and in serving ads on web sites. There was plenty of skepticism there.