The Math On Social Networking Still Doesn't Add Up

from the in-flay-shee-on dept

Tue, Dec 12th 2006 5:01pm — Carlo Longino

We've wondered about the valuations getting tossed around for social networking sites before, since they always seem to underestimate history -- in particular the fact that the web is littered with the remains of social-networking and community sites that have fallen prey to the faddish nature of the genre. It's a little surprising to see, then, Yahoo's internal projections for Facebook, part of a set of leaked documents that were reportedly prepared for takeover discussions. The story goes that, in the middle of the year, Yahoo offered a straight-up $1 billion for Facebook, which despite media reports, wasn't enough -- so Yahoo was prepared to go as high as $1.62 billion. This offer was made based on a projection that Facebook's $50 million or so in revenues this year could grow to $969 million by 2010, and generate $1 billion in profit by 2015. That's some, uh, healthy growth, to say the least, apparently grounded in the belief that Facebook's user base will continue to grow and reach 83 million by 2015. There are a few potential problems here: first, it's awfully hard to believe that Facebook will still be relevant and attractive in 9 years, given the disappearing nature of previous social-networking sites. Second, a significant challenge for Facebook will to be to hold on to its users as they age, so that user numbers grow, instead of aging users just being replaced by new younger ones. Finally, and most importantly -- those user numbers are meaningless without a means to monetize the traffic, something Facebook and its ilk really still haven't managed to figure out. For all the talk of the riches social-networking can offer, they aren't materializing, except in inflated buyout offers.

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12 Comments

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SimplyGimp, 12 Dec 2006 @ 5:38pm

No foresight?
Do these companies think MySpace, Facebook and the likes will have a niche on the web within 10 years? Seriously, do they think it's going to grow THAT much with the onset of other technologies that are pushing their way into the social aspect of being online?

If they honestly believe this, then I think they need to go ahead and piss away that 1.62 billion and make some people rich.
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Matt, 12 Dec 2006 @ 5:50pm

I don't get it
My problem with online social networks is that I don't understand the point of them. I can subscribe to the idea that you can meet new people, but these outlets just seem so pointless. I had joined a few of them but only because everyone else was doing it too.

Other sites that have some point of discussion, collaboration, or interests (like Slashdot, Flickr, games, knitting, whatever) are more likely to get me interested in online social networking. Sites like those have purpose which is what attracts me. That's just my personal take on it though.
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NewSpice, 12 Dec 2006 @ 6:06pm

Facebook is an address book.

I can get the current locations, phones, and IM's of people I know. I can see if there is anyone in my network with a couch in Oregon.

That is its practical use.

I don't spend hours on it. And if I do log on, I never look at the ads. I never look at ads period. I have adblock + flashblock, and so do most savvy users. Any company that is stupid enough to think there is that much revenue involved, even with any kind of statistical sales, deserves to lose the money they spend on a buyout.

In a few years, there will be a new facebook, with another gimmick, like teledildonics or real-time gps tracking of your friend's dogs. What part of Trend don't executive understand?
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- T, 18 Apr 2007 @ 6:59am
  
  Re:
  I understand the concern with the potential over valuation of some sites. However, the key point is that investors are looking at is that Facebook and others are not a "fad." These social networking companies will position themselves strongly in the market. When the new "idea" or technology comes out, the leaders of today will have the money and clout to implement or copy any of them immediately or with time.
  
  Think of the McDonald's scenario...do you think the next person that creates a good tasting hamburger is going to take over the fast food hamburger market?( Highly unlikely) And, Microsoft, Dell, Apple, and IBM are not going anywhere either in light of the new kid on the block. Basically, the online social networking market leaders are being established today; the leaders will make exchanges within the top 5 to 10, but will likely remain the top leaders for a very long time if not forever. "Everyone else" can simply hope to get a slice of the pie; others will only be able to hope to obtain a billion dollar offer.
  
  Moreover, there does not appear to be a full proof way to avoid all advertisement online....one might even see a strategic product placement in a music video or trailer to a movie, which is essentially an "ad," not to mention, the inevitable buzz that can occur within a community. Or, maybe one can jut change the "channel" only to eventually run into an ad five to ten minutes later.
  
  Yet, 'true' --a strong valuation metric is not completely in place. Nevertheless, the diverted market share from other forms of media can be used as a measuring stick... tv, newspapers, radio all have measuring sticks and founded worth; users are rechanneling their attendance or participation into social networks and the Internet in general, today. The advertising money is simply recycling into other mediums; it will likely not be lost.
  
  Besides, honestly, do you think any established business in their right mind would just look to gamble 1.6 billion away? They are conducting business not gambling. They could trade on the FX market for an unstable investment. They know that they can use Facebook for what it is now and use it in other capacities relative to the technologies and service/product launches they have in mind for the future.
  
  I randomly came across this thread, and thought I would comment. Thanks all.
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Sam Jackson, 12 Dec 2006 @ 6:13pm

So good to get some more realism here... too often I see the mainstream media just hype hype hype social networking whenever they talk about these valuations and everything. Some kind of giant stock-inflating complex, perhaps? No idea.

Fred Stutzman did a good job picking apart some of the problems with this valuation at his blog Unit Structures today (http://chimprawk.blogspot.com/2006/12/problem-with-yahoos-facebook-numbers.html ).

Just from where I stand, as a user of Facebook and someone surrounded by hundreds of facebook users every day with whom I frequently discuss Facebook (wow, our lives must suck!) the future is quite murky.
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Sydney, 12 Dec 2006 @ 6:57pm

Not Necessarily SUCH a bad idea
"Do these companies think MySpace, Facebook and the likes will have a niche on the web within 10 years? Seriously, do they think it's going to grow THAT much with the onset of other technologies that are pushing their way into the social aspect of being online?"

I don't know... As far as MySpace is concerned, it wasn't BUILT to BE a social networking site. It was built so that people could share their own music online. I don't think that anyone ever expected that it would grow so exponentially and morph into what it is today. And MySpace IS a nice way for people to band together regionally.

As far as yahoo goes, they have integrated a unique user experience with their PM's that offer easy video, photo and voice options. I can see where they were coming from with the thought of adding facebook to that.

I do, however, think that 1.62 billion is a PRETTY HEFTY price.
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Bill Fong, 12 Dec 2006 @ 10:46pm

Numbers don't add up
The other number that doesn't add up is the total US population is just over 300 million. They would have to go international to generate 83 mil users and that would be a whole set of new problems and issues.
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rishi, 13 Dec 2006 @ 12:42am

Well, Robert murdoch paid $580 million for MySpace and got $900 million from Google just as advertising revenue a few months later.
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Brad, 13 Dec 2006 @ 1:53am

rishi is an idiot
Revenue isn't the same as profit. Myspace manages to spend a lot of money on very little, but it does have a massive server bill to pay.

The $900M wasn't a lump sum, it's Google's projected spending over 5 years, and it isn't a contractual obligation. It's just an expectation that THAT is how much Google will spend.

Google's will soon be aware of people who use Adblocking software (esp. with AdSense), and will not bill that to the advertiser, nor pay the display site. The visit won't even count.

Rishi is an Idiot. Social Networking Sites are NOT profitable in and of themselves. They are a source of vast market research, which is what Rupert Murdoch (not ROBERT) was purchasing. As an ongoing source of information about the products, bands, movies, and social trends young people are interested in, it'll help them make more money on other sectors.

MySpace is a giant focus group; nothing more.
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The infamous Joe, 13 Dec 2006 @ 4:37am

Word on the (real) streets.
I live pretty close to a college, and I've heard from those college kids only negative things about Facebook-- I expect it to go the way of the Crystal Pepsi.

MySpace, I think, will survive a bit longer... afterall, you don't see new movies or shows with their own facebook page, do you?
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The Original Just Me, 13 Dec 2006 @ 6:00am

China
I think a lot of these 'pie in the sky' projections are hoping that a couple billion Chinese Internet users will push advertising even higher. While this is debatable, I find it somewhat amusing that these valuations seem to exceed the projected growth in advertising budgets, so where's the money going to come from?
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Sam Jackson, 13 Dec 2006 @ 7:56am

actually...
The infamous: You do, or at least, you did. Sort of. Facebook tried doing it a few months ago, I suppose when they were in a particularly MySpace-y kind of mood. They were not, however, very popular.
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