BUSINESS BLOGS
BUSINESS BLOGS
category: business
02 Nov 2006

The revenue outlook for social networking sites has always been murky.  Case in point?  When MySpace was acquired by News Corp. for $580 million, critics called foul and suspected another bubble.  Today with MySpace being three times larger, everyone thinks that Rupert Murdoch and his top dog Ross Levinsohn are geniuses.

RBC analyst Jordan Rohan added to the euphoria by saying that MySpace would be worth $15 billion.  It won’t.  It might, but not anytime soon.  And even if it would be worth a hell of a lot, its value will be within News Corp., and the kind of multiples News Corp. gets implies that MySpace’s revenues and profits would have to be so high that make his entire argument not very realistic.  But, every analyst tries to make a name for themselves: one day it’s Jordan Rohan, the other it’s Merrill Lynch’s Justin Post.  They’re just doing their job.

And when it comes to someone else who seems to be putting his head down and doing his job and not letting the external noise affect him, comes Facebook’s founder and CEO Mark Zuckerberg. 

While Facebook is much smaller than MySpace, it does offer advertisers some nice benefits, such as a lack of anything goes content that freaks out mainstream marketers.  Oh, it probably boasts less sex predators as well.  That’s always a nice addition if you’re Procter & Gamble or GM.

Just this afternoon, I wrote about how fickle the Web has become: last month Facebook was a darling about to fetch $1 billion, today Mark Zuckerberg is questioned for not selling.  I certainly must say that I think that Zuckerberg can be criticized for many things, but not selling should not be one of them.  Once you sell, you lose everything, no matter how much money you pocket.  If Mark values his freedom more than the $200-300 million he stands to make, more power to him.

Well, this evening I read some interesting stats courtesy of Bambi Francisco’s blog:

In 2006, ad spending on US social networking sites is expected to spike to $865 million from $350 million in 2006, according to eMarketer’s just-relased report, Social Network Marketing: Ad Spending Update. By 2010, eMarketer estimates, spending will hit $2.15 billion. These numbers make Facebook - the most popular independent social network — look a lot more attractive to Internet and media companies. Facebook wants well more than $1 billion if it’s to sell.

As these numbers suggest, maybe Mark is onto something after all.  And… in four years, he’ll be 26, far more mature than any 22 year old can… man, I sound old, and I’m 28.

If:

- the social network market were to be $2.15 billion, and Facebook - as a far distant second place player to MySpace - could get 10% of that (in search, admittedly a different market, market leader Google gets 50% market share and 25% of US online ad dollars, number 2 Yahoo! boasts 30% and 18% of the US online ad dollars, so a 10% share in all social network dollars is not unreasonable),

- That’s $215M per year in revenues,

- Assume a 35% profit margin (since the content is user generated, we can assume a high profit margin), that’s $75.25M in profits each year. 

- Tack on a conservative P/E of 30 and you are looking at a valuation of… $2.257 billion in 2010.

I don’t know if Zuckerberg, his investors and management team have seen these numbers or done the math, but if the offers he’s getting now are for $800 million and he wants $2 billion, he might just have to wait four years.

Of course, older guys recall how easily markets as fickle as the Web can turn to be.  Just ask former Excite co-founder Joe Kraus whose paper wealth all but evaporated and yesterday “contented” himself with a much smaller sale of his latest company Jotspot to Google…

And, this also assumes that the ever more fickle high school and college crowd think that Facebook is the coolest thing since sliced bread…

No guarantee in that.  Zuckerberg dropped out of Harvard, had he stayed, he would have learned about the bird in hand theory.  Of course, in the school of life, only he knows the answer:

Is $800 million for sure better today than maybe $2.2 billion in four years?  If he owns 30% in the company, this means $240 million today versus a potential $677 million in four years.  Of course, the likelihood of him getting that - or anywhere near that - is up for discussion.