Friday, 7 January 2011

Facebook valuation/ IPO - too much hype, not enough cash?

There's alot of press about the $50B value that private trading has put on Facebook. I have a couple of thoughts on it, which are begining to crystalise in a view that the valuation is inflated by 2000-esque dotcom hype.

Firstly, the small portions of Facebook being sold off to Goldman Sachs et al are not based on efficient market prices - instead, they are based on the buyers' desire to own the in-thing before they miss out. Now, I can understand entirely that no one wants to miss out on the next Google (market cap currently hovering just under $200B), but I can't help but think that Facebook is an entirely different animal.

The great thing about Google is that it appeals to everyone. At its heart it's very simple - a clean, simple and accurate search engine. So consumers love it and use it in huge volumes, increasingly as a landing page into the web (a significant proportion of queries are now web addresses, sans "www."). Therefore advertisers love it and Google makes money hand over fist.

Now, with Chrome, Android and the forthcoming Chrome OS, Google owns the landing page into millions of mobile phones and tablets. All of this front end is supported by the largest IT infrastructure in the world.

Contrast Facebook, which is an in-browser (or in-app) experience. It is disintermediated by Google and Apple (and equivalents) on every platform. On mobile, its ad-model is compromised by the rise of mobile app platforms from Apple, Google et al that sit infront of it on the device. Furthermore, its customer base is not universal.

Although 500M people have Facebook profiles, I wonder how many are truly active and from that active base, how many are in purchasing classes. It's a teenaged phenomenon Personally, I have a Facebook account (and Myspace, as it happens) and used to be an active user, but soon became tired by the instrusive applications and "targeted" adverts. Now I use Twitter, Flickr and SMS, with email reserved for work.

And this is my issue with Facebook - it isn't a universal tool in the same way as Google. It's just one of many communications and contact management tools and not even a particularly popular one when judged against switched voice, SMS and email. Its monetisation method is also weaker than the platform providers, because it lacks direct access to the features of the device it runs on - not a problem for Apple Mobile Ads or any Google/ MS/ Nokia equivalent. Its great for Playfish and the other application providers and reasonably useful as another channel for advertising. And that's all.

Don't take this as me thinking Facebook is in any way doomed. I'm sure it will eventually be a profitable business of multi-billion revenue scale. It just won't be as cash generative as the big boys and could even end up like SkyPE - a flash in the pan... I certainly wouldn't pay a slice of $50B for it...

...more interesting to me is the rumoured LinkedIn IPO. Since I use that a lot, I'm thinking of buying in. At least then I'll have a tiny amount of control over my personal information :).

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