Facebook: World Domination Ahead (note to Google & Microsoft -- don't pull a "Semel")

  Facebook: World Domination Ahead 
  chart by WSJ

people keep talking about how Facebook platform is taking off (or not), and is Facebook catching up to / beating MySpace, but they're missing the real story.

imho, with the launch of Facebook Platform, they've not only already eclipsed MySpace, but also eBay, Amazon, & Yahoo... and in fact are now contending with industry juggernauts Microsoft & Google for the title of Most Valuable Monopolist (MVM) and the most likely to achieve World Domination.

Over the past 20 years, here's my list of successful MVMs:

• Intel = Most Valuable Monopolist, The IC (1980's-curr.)
• Microsoft = Most Valuable Monopolist, The Desktop (1990's-curr.)
• Cisco = Most Valuable Monopolist, The Network (1990's-curr.)
• AOL = Most Valuable Monopolist, Email + Gated Internet (1992-2001)
• Yahoo = Most Valuable Monopolist, Search Act I (1994-2000)
• Amazon = Most Valuable Monopolist, Books + New Goods (1995-curr.)
• eBay = Most Valuable Monopolist, Used Goods (1995-2004)
• Craigslist = Most Valuable (but mostly free) Monopolist, Classifieds (1998-curr.)
  
• PayPal = Most Valuable Monopolist, Online Payments (2000-curr.)
• Google = Most Valuable Monopolist, Search Act II (2000-curr.)
• Apple = Most Valuable Monopolist, iTunes + iPod (2003-curr.)
• MySpace = Most Valuable Monopolist, Social Networking Act I ==(2005-May 2007)
• YouTube = Most Valuable Monopolist, Online Video (2006-curr.)
• Facebook = Most Valuable Monopolist, Social Networking Act II (June 2007-curr.)

(i may be missing a few but i think i've covered most of the notables... feel free to pile on in the comments, and/or make corrections to dates above)

So it's been much discussed over the past few months about how Terry Semel fucked up by not buying Google for $3B in 2002, or more recently not buying Facebook for $1.6B last fall.  I'm not sure they really had the money -- and certainly not the balls -- to pull the trigger on either of those, and hindsight is always 20-20.  Ditto for eBay & PayPal, at least the first 3 times Meg Whitman tried to buy them out.  She finally did the deal only *after* the PayPal IPO, and probably paid a shitload more than if she had decided earlier.  But unlike Semel, at least she *did* make the right call eventually... and now she looks like a genius.

Now let's compare Facebook's fast-approaching domination of [personal] social networking & consider potential liquidity events, of which i'm pretty confident there are only 3 left:

• IPO in next 12 months
• get bought by Microsoft in next 12-24 months
• get bought by Google in next 12-24 months

Reviewing the history of PayPal's IPO & subsequent M&A, it's been said Meg passed on paying the price Peter Thiel wanted the first few times they met. Only after the IPO set a floor of ~$700M for the company (and after a perhaps ill-timed insider secondary offering a few months later set a ceiling) did eBay finally agree to buy PayPal for ~$1.5B.  Again in hindsight, it was a steal -- PayPal has easily contributed 5x in value to eBay the past 5 years, and PayPal is now responsible for up to a full 1/4 of eBay's revenue.  Meg may have balked thrice, but in the end she still got a damn good deal for eBay shareholders.

Fast-forward to today: Yahoo is now acutely aware of their error in not buying Google or Facebook when they had the chance.  Perhaps in Semel's defense, it really wasn't clear Google & Facebook were on their respective paths to World Domination at the time Yahoo had opportunity to cut a [very expensive for them] deal.  However, it's now become apparent that Facebook is absolutely an Irresistible Force & is quite unstoppable.  What might have seemed expensive @ $2B a year ago now seems like a steal for $10B. (if you want to follow the lesson of swallowing your pride & making a good call the 2nd time around, talk to David Sze at Greylock.  very. smart. dude.)

Yep, you heard me right: $10B with a capital 'B'.  If you only consider the Facebook-Microsoft advertising deal alone (~$900M over 3 years sorry my bad that was MySpace-GOOG deal... anyone know actual terms?... let's guess ~$50-100M/yr), those are the kind of revenues that makes it easy to think Facebook can do an IPO.  And what kind of IPO would that remind you of?  Hmm, i'd have to say it sounds similar to something named GOOG.  Now i'm not an analyst, but with their growth & revenue, i wouldn't be surprised to see high-single to low double-digit billions in market cap for them... at least at the close of the first-day open.

Alright, so now let's consider alternatives to IPO... who's left who could buy them out?  Well assuming Zuck is willing to sell to *anyone* -- and it's not clear that he would -- there are probably only 2 players remaining who would be motivated & capable: Microsoft & Google.  They both have the dollars, and they both probably don't want to be left out in the cold on social networking.

Now, are either of them willing to buy Facebook for a $10B+ number prior to IPO?  Very unclear.  But if i'm Eric Schmidt or Steve Ballmer, & i'm even considering that deal, i'm REALLY WORRIED the retail market will go ga-ga over Facebook, and set an unrealistically high # after they go public.  I'm talking like $25B+ unrealistically high... think about it.  Aside from the go-go late 90's, when has the public jumped back into Internet stocks?  You got it... GOOG again.  And they piled in.  And it went up.  And they piled in some more.  And it went up.  And they're still on board at $500/share.

So if that's the most recent example, what's to stop the public market from kicking Facebook's market cap up to some nosebleed numbers post-IPO?  Absolutely nothing.

Now Mr. Schmidt & Mr. Ballmer: how much is Facebook really worth to you?  $5B?  $10B?  more?  And how long are you willing to wait?  Until after the IPO?  The price is just gonna keep going up.  I'm glad i'm not either of you guys, because just like Terry you'll be criticized either way.  But that's why they pay you the big bucks, right?  Big Decisions require Big Checkbooks... not to mention Big Balls of Steel (clips).

Just remember in these situations: better to pull a Whitman than a Semel.

Comments

[Hiep Do]

I GUESS FACEBOOK CAN BE WORTH MORE THAN 25B

I think Dave did posted a brilliant piece. Just like to add some more notes:

1. FB is not simply a social networking. In fact it has evolved into something like a social/online operating system, onto which other apps can grow. This is really disruptive, and it threatens to make the business model of Microsoft (offline software) and Google (online search) irrelevant.

2. Look at the market cap of Microsoft and Google today and suppose if Facebook is the evolution of Technology Wave 1 (Microsoft) and Wave 2 (Google), you can guess how much it would be worth in the next 3 years. I think Dave's estimate is tamed.

3. Execution. FB can be a failure or a new Micro-Google, it depends on the execution skills of Mark and his team, including his partners. Mark has an unparralled vision, a strong committment, and a goodwill to make the world better. More, he is followed by millions of wholehearted supporters and fans. This would be a force to help him reach many things in the next 2 years, which today is illusional to most people.

Only time will tell, but I has the same feeling as Dave.

Hiep Do

[tas]

Dave -

Great post. The doubters about whether FB is worth anything are funny. Even at crap cpm's MySpace and FB are generating hundreds of millions of dollars of revenue. And the advent of profile targeting likely turns both into multi-billion dollar advertising networks.

But in the case of MSFT - it's not about the advertising revenue that's appealing - it's the potential of owning another generation of developers as I argue on my blog: http://www.sawickipedia.com/blog/2007/09/25/why-microsoft-wants-facebook-its-not-what-you-think/

Microsoft needs FB's hipness badly and for Microsoft $500mln is a small price to pay for getting to date the cool kid.

[Paul O'Brien]

Brilliant post Dave
Love the easily overlooked comment from Robert "It's an awesome service, but it's self limited. I can't add the CEO of the bread shop down the street as a connection, because he's not in the network."
I assure you this is the next step coming from one of the major networks. All Yahoo has to do is turn on their profile pages (each person used to have a profile page, I can't even find it any more) and add connectivity between them and suddenly they are a social network of millions.

[Jason Kemp]

OK - I get your point that the monetization hasn't caught up with the full value of Facebook yet.

Marc Andreessen had a nice piece on FB 5 weeks in.

BTW - top marks for your support of microfinance. I have been watching prosper (another $20m in funding on June 20)

Also Mint and Spock look promising.

I did turn down an invite to Spock because I didn't want another webservice or other codebot accessing my contact lists just yet.

Anyway I have now subscibed to your RSS feeds.

[Jason Kemp]

Hi Dave,

I agree Doug's position is provocative and It is the wrong answer when clearly there are big players who will pay. Ebay, Microsoft, Google and Newscorp spring to mind - most of whom already have made bets in this space.

Just because some of us don't think Facebook is worth huge money doesn't mean someone won't pay over the odds because they have a different angle or other ways to leverage this audience.

For example Youtube revenue in 2006 was only $14m and the purchase price was $1.6b but that wasn't cash it was google shares.

For Youtube, Myspace and Facebook some form of video related advertising model must be able to drive revenues. The question is exactly how.

Microsoft is the obvious buyer with X box related audiences who are already on Facebook.

The other number to look at is online advertising revenues. These are now at $5b per quarter. By contrast the overall ad revenues are something like $446b - so online is miniscule but $5b per quarter is still worth chasing.

It is significant that the $5b buy of Dow Jones is ultimately part of a television play that will leverage online, high quality news content and the new Fox business channel to extract the maximum revenues.

I'd be watching this proposed deal closely (see my blog) as I think it offers more clues on how some of these elements are going to play out. (such as Newscorp & myspace)

I personally think myspace is ugly in a retro 1997 kind of way - but it is has "crossed the chasm" as they say and brought online a whole generation of trivial pursuits.

The really important thing is what the myspace, facebook, youtube people going to do when they realise it is 2007 and there are perhaps more important things to do than navel gazing.

But on the other hand - there is those famous quotes "every crowd has a silver lining" and the one about not undestimating the public taste when it comes to making money.

In summary you are more likley to be right with your numbers than Doug is.

But for once it would be good to see some reasonable analysis of this all.

I do think we have finally reached a kind of tipping point with the internet - where mass markets now are playing on the internet and that has to have some commercial upside.

[Dave]

thanks for the comment Jason, however i couldn't disagree more with you & McIntyre.

if you & he think people on Facebook "canot be organized in any logical way", then i think you've missed the entire foundation of Facebook with regard to the social graph, the news feed, and how the news feed integrates & interacts with facebook apps and facebook members. read my article on Marketing Facebook Apps & Justin Smith's article on News Feed Optimization on Inside Facebook.

the advertising & monetization opportunity on facebook is monstrous, and it is not an understatement to say that the folks over at Google are probably looking over their shoulder at this one.

Facebook is the first serious contender that has the capability to disintermediate Google, and provide better profiling & targeting.

If that isn't a huge opportunity to make money, and Facebook isn't worth north of $25B in 3 years, then i'll buy you a beer.

until then, let's just wait & see.

- dave mc

[Jason]

I believe Facebook revenue is about $50m.

Douglas A. McIntyre at 24/7 Wall St believes they are worth zero at the moment.

"The answer is that social network sites deliver an audience that its almost useless to online marketers. The people who go to sites like Facebook cannot be organized in any logical way as visitors to Yahoo! Finance or AOL Movies can be."

Facebook is just another version of Geocities except the narcissism is more pronounced.

It is way too much information and only encourages identity fraud. Without a business modelI am inclined to agree with Doug.

www.247wallst.com/
2007/07/why-facebook-is.html

[yeeguy]

Awesome post, Dave. This is DMC at his hard-hittin' best! :-)

I think we're still pretty early in what you're calling "Social Networking Act II". The big open question is: will MySpace follow suit with an open network? Would love to hear your thoughts on whether or not MySpace will create a developer platform of their own, and how that would play out vs. F8.

Also, an interesting piece on Facebook vs. MySpace demographics:
http://www.danah.org/papers/essays/ClassDivisions.html

[Tina SEO Kelly]

WOW! I didn't know those figures were that high. Thanks for the info. Keep up the great blog. I think we should all start looking at AT&T aka Yahoo aka SBC aka a bunch of Bell companies which Yahoo purchased.

Oh and just for the books. Yahoo or SBC purchased AT&T and are going with the death-star symbol. I don't really understand the Yahoo/AT&T Incestual non-relation. It would be good to research this one.

I know I'm more of a Semel than a Whitman. too bad for me. And I do have balls of steel, just lacking good judgement obviously.

Tina

P.S. Visit my pathetic blog at http://InOutPublishing.com/press

[Arik Czerniak]

right on :)
i don't know about $10B but 2-4 seems reasonable as FB is going to dominate the people-space, people search and if they're smart linked in and any other people related model too.

[Robert Dewey]

Dave,

Definitely no argument with the numbers.

I realize that Facebook and LinkedIn cover two very separate markets, and both have tons of users. The point is that they can never fully reach critical mass by limiting who their users can connect with. An invitation is nice, but what if my entire address book could be added to LinkedIn? That's useful, for the simple fact that someone might need to get in touch with them.

Geni's growth was quite strong, and they are one of the only networks to employ a similar tactic. In other words, you add your family - you don't have to wait around for them to sign up.

Why hasn't Yahoo or AOL built a network around communication? I'm not sure. Perhaps it's pure stubbornness... Or maybe it's the same reason why Barnes and Noble didn't build the biggest online bookstore before Amazon. I just think e-mail needs a jump, and becoming social could very well help it out.

[Dave]

@Robert: can't disagree that there's a lot of email out there... but if that's the hook, then why haven't Yahoo, MSN, or AOL already won this battle? fact is, they've had 10+ years to figure it out, and still haven't... in fact, i'd say Plaxo or Gmail is closer to doing it via email. (or maybe startup Pelago or others via phone).

also, Facebook <> LinkedIn. LinkedIn = business, Facebook = personal. LinkedIn is doing fine, but if you look at the metrics there is no comparison. Facebook might not get to billions of people right away, but i bet they'll cross the 100M people barrier in less than two years. they're already at close to critical mass for at least US & Canada populations. remains to be seen if they can go Intl, but even if it's just English-speaking only they'll be a force.

in summary: just look at the #'s. they don't lie.

[Robert Dewey]

I dunno, Mr. 500.

Facebook is definitely growing fast and moving in the direction with the open F8. But...

E-mail and instant messaging already form the basis of real social networks. Open protocols can scale to the communication needs of many and provide cross-platform (i.e. Gmail to Hotmail), where does social network messaging stand?

LinkedIn is a prime example. It's an awesome service, but it's self limited. I can't add the CEO of the bread shop down the street as a connection, because he's not in the network.

Maybe it's me, but I find it a little bit stupid that I know all of my contact's information, but can't add them to my network because "(s)he hasn't created an account yet."

There are 1.8 billion active e-mail accounts. How many people use Facebook again?

[Peter S Magnusson]

@Jeffrey:

Not to dig too deep a rat hole, regarding "by definition, a monopolist leverages its monopoly to beat down partners and competitors", that's the behavior of a misbehaving (law-breaking) monopolist. A monopolist is anyone who dominates a market to such an extent that they can act as if they had no competition with respect to things like pricing, product releases, etc.

But in his MVM list, Dave is stretching this a little bit to make a more general point about companies that manage to dominate markets in a near-monopolistic fashion.

[Jeffrey McManus]

Although FB has all the momentum, it's probably premature to refer to them a monopolist. "Being big" or "growing fast" by themselves don't suffice -- by definition, a monopolist leverages its monopoly to beat down partners and competitors. So, unlike MySpace (which was the most valuable social networking monopolist for about three weeks in late 2006), if anything Facebook is acting like an anti-monopolist.

[Peter S Magnusson]

To your excellent MVM list, I might add:

IBM = Most Valuable Monopolist, High-End Servers (1960s-present)

Nokia are a close call, but with "only" 36% market share they're not a monopoly, and there is little indication that they will become one. But it can be argued various ways - Google's market share of search is "only" 49.7%, but it's rapidly gaining share.

(AT&T (v 1.0) would easily make the list but your cutoff date is 1987 and they got broken up in 1983.)

But to the real point of your posting, great analysis and commentary; indeed there is a looming new gorilla with wall street currency that might shortly start throwing it's weight around.