Last week, I asked Mark Zuckerberg how he would see MySpace and Facebook coexist under News Corp., with the implication being that Rupert Murdoch dreams of acquiring Facebook and would eventually make it happen.
It was a couple of questions in one :
- is News Corp. really that interested in Facebook?
- would Facebook actually sell to News Corp., a media company, that already owns Facebook’s bigger direct competitor MySpace?
- does Mark, in fact, view MySpace or Google as his bigger competition?
The question was moot, as Zuckerberg answered “that won’t happen”.
It was something we hear CEOs of privately held companies say all the time, but his answer was slightly more convincing than when YouTube co-founder Chad Hurley said “we’re going to IPO” in the summer before Google bought them.
History Repeats Itself?
While MySpace remains the most obvious, direct competitor to Facebook, I think Facebook’s main competitor is Google and has been for a while. Maybe that explains why Microsoft is about to invest $300-500M for a 5% stake in Facebook (maybe).
The reason why Google is Facebook’s larger threat is simple: MySpace is part of News Corp. and is, as such, a media company, whereas both Facebook and Google are technology platforms that try to remain neutral. That’s another thing that Zuckerberg kept stressing in his interview with Michael Arrington at Tech Crunch 40.
But, it’s not just that Facebook views Google as its main threat; the feeling must be mutual, because Google is planning to out-Facebook Facebook in the coming weeks.
Well, that’s the spin, anyway. For over 2 years now, Google and Facebook have been competing, even if they were not acutely aware of it. It’s just that with Facebook gaining momentum and Google’s stock - and expectations - at all time highs, there is an inevitable clash waiting to happen. And we can’t wait to witness it.
Google is a Social Network
I won’t get into the social graph vs. network rhetoric, to me, it’s semantics.
What is important to note, though, is that Google is already a social network, people just don’t know it yet.
For the initial part of Google’s history, users interacted with the search giant in a confidential way. Then, things began to change as Google started to make acquisitions and launched new products.
Asking the Right Questions
From 2003 onwards, people kept asking whether Google would become a portal, whereas they should have been saying: “Look, Google is becoming a social network”.
After all, email is the biggest connector of people, and as such, the glue that holds a social network together. No wonder Google is adding improvements to Gmail.
But there is much more to Google’s identity as a social network these days, the transformation, in fact, began a few years ago. Acquisitions like Picasa, Blogger, YouTube and product launches like Gmail, Calendar and Docs changed the way Google interacted with its user base: now, a lot of users are signed in to Google as they surf the Web. When you are in Gmail, until you sign off, you are technically in Google’s network that includes all of its products, but also all of your searches and surfing patterns. The purchase of Urchin amplified this.
In fact, a real social network is open, and there is no more open ecosystem than Google, that is the Web. Facebook will be opening up soon because it finally realized that it cannot be the social utility it strives to be and remain closed.
This is probably nothing new to those who follow Google’s every move, but one reason why Facebook wants to open up more and more is that it probably realizes that its closed network hurts it a lot more than it hurts Google.
In fact, Google could very well not need to buy Facebook because it’s already a bigger social network than Facebook. But, that does not mean that it won’t consider it, because Facebook is a fantastic asset for Google - or anyone else - to have.
Haven’t We Been Down this Road Before?
Of course, Google is publicly doing the opposite:
- pretending it’s not a social network,
- saying that it’s not yet a threat to Facebook but wants to become one.
Consider the following: apparently, Google got 15 luminaries together, made them sign NDAs, chatted about what to do to beat Facebook. Yet, within hours, Tech Crunch got a handful of these luminaries to a) violate their NDAs and b) cross Google by going public. What’s my take on it? I think this is all part of the PR effort to make Google seem like an upstart to Facebook when in fact, Google is the bigger social network that is about to weave itself further together to officially overtake Facebook and MySpace as the biggest social network.
Think back to the MySpace deal. Why would Google so overpay (as I argued on deal day) and pay a whopping $900M for an asset it could have bought for $580M previously. Could it be, perhaps, that Google sought the data it would get by way of that deal? In fact, MSFT has all of the data in the world on Facebook, and maybe that is why it’s not crazy enough (yet?) to pay what Facebook’s investors are asking, knowing full well that a closed social network is not worth as much as some claim it is?
Maybe.
Bottom Line
The outcome of this inevitable clash of the titans is pretty clear.
This is awfully reminiscent of Google’s efforts in video, which culminated with Google buying YouTube for $1.65B just less than a year ago, subsequently shelving Google Video. That was a likely outcome because both companies were backed by Sequoia Capital.
While YouTube had little in the way of path to revenues, let alone profits, it had only raised $11.5M and could have continued to weather the storm by raising more money. It had momentum, after all. We’ve dubbed YouTube the most explosive web startup of all time, ironically, we’ve called MySpace the best M&A deal of all time.
Facebook, technically, has certainly moved up the list on the former list, and depending on its eventual exit could make the latter, too.
Google’s Real Asset: It is the Web
Back to YouTube, one reason why it chose to exit when it did was the legal question: alone, it would have been vulnerable, under Google, it’s not.
Forget the barrage of lawyers, Google carries a far bigger stick: traffic. With Google accounting for 66% market share in search, and 8 out of 10 websites being discovered (and recovered) by way of search engines, media companies that lack portals and high traffic need to be nice and kind to Google. Viacom, currently suing Google for $1B launched a network of dozens (or was it hundreds) of websites. These websites need traffic. Google might not be evil, but it’s not stupid. The more pressure Viacom applies to Google, the lower the search engine mojo these sites will have. I don’t need a PhD in mathematics or computer science to put 2 and 2 together and realize that.
Traffic Counts
Connecting the dots, the day Facebook goes open and search engines can index it, it will gain an immediate thrust of additional search engine traffic… but overnight, it will become vulnerable to Google, too. This is a major consideration that people are overlooking.
When GoTo.com was acquired by Yahoo!, it lacked negotiating power because it had little direct traffic. GoTo.com generated revenue by way of distribution deals with AOL, Yahoo! etc., so if Yahoo! were to cut off GoTo.com, its revenues would fall, become cheaper, and Yahoo! could buy them cheaper afterwards.
Thankfully for Facebook, it’s one of the largest sites in the world and will probably not rely much on Google for traffic, but over time, if Google owns 66% market share and indeed 8 out of 10 websites are found by search engines, do the math and you will see that in any negotiation or competition, Facebook will lose out to Google.
That is why, despite what people say, invariably, Facebook will listen to any deal Google has to offer.
What about MSFT? Let’s see…
VCs’ Power Struggle
Mark Zuckerberg clearly does not want to sell. Like all entrepreneurs in their early 20s - and having taken some money off the table - Zuckerberg is really aiming for the fence. But his backers, namely Accel, Meritech and Greylock might find themselves in a position where they will have to consider the inevitable reality that Facebook is:
- increasingly pricing itself out of the M&A market and is too expensive for most companies to acquire and
- lacks the revenue growth to IPO.
Yes, I know, it took Google a few years before finding its revenue mojo, and once it did, revenues scaled:
- Google’s 2002 revenues grew 409%
- Google’s 2003 revenues grew 234%
- Google’s 2004 revenues grew 118%
- Google’s 2005 revenues grew 92%
- Google’s 2006 revenues grew 69%
- Google’s 2007 revenues will grow by 50-60% to over $15B.
But search is one thing, an actual social network is another when it comes to monetization. For more on that, see my “Memo to Facebook’s Sales Team” post.
Just a couple of months ago, I outlined the case for why MSFT was the only company that could buy Facebook. Read that here.
While I don’t think it makes financial sense for Google to buy Facebook for the following reasons:
People frequently think that Google will buy Facebook, but the problem is that Google today has about $10B of cash on hand (after you add the $1.5B it has added from operations in 2007 and the $3.1B it has earmarked for DCLK).
Sure, it can sell more shares in a secondary offering, and at a high of $500+/share, maybe Sequoia, Kleiner Perkins and the Google co-founders would sell $5B worth of shares or so to bolster their warchest for a run at Facebook, but those are a lot of “if’s and maybe’s” and until they do so, they are not really in the running to do so.
Then again, Google can always make a stock-based deal for Facebook with unrestricted shares which would allow Facebook shareholders to sell as many shares at any time. But, I personally doubt Facebook’s shareholders would swap ”cash in hand for shares in the bush”.
As well, I doubt Google would want that, because if Facebook shareholders decide to sell the shares en masse, that would put a considerable downward pressure on Google stock. Sure, at a market cap of $165B, paying something like $5B for Facebook means that it’s a drop in the bucket (didn’t we say the same thing about YouTube and its $1.65B price tag… drops add up, you know).
But, if Google shareholders know that Facebook shareholders got unrestricted shares and will start to sell, causing downward pressure, then the domino effect would entail Google shareholders to sell too. That is one slippery slope than could institutional investors, Google investors, Facebook investors and many individual shareholders to sell their shares and send Google tumbling down, because everyone will want to buy the shares back later at a lower cost. Google’s army of PhD’s have probably thought about this… at least I hope.
In this context: only MSFT and News Corp. have the wherewithal to pull the trigger, unless you think Google will part with 60% of its cash for Facebook, which is unlikely.
It would be a grave mistake for Google to let Facebook fall into MSFT’s hands. I don’t think Zuckerberg wants to sell to MSFT. We also know he won’t sell to Rupert Murdoch.
Facebook is considering raising even more money, and might, to weather the storm and go deep, real deep. But what I see happening is Google will make a run for Facebook (yes, despite what I said above). Heck, financial engineering can do wonders, in one post, we tripled the value of a publicly traded company, after all.
Tale of the Tape
Point is: Google is now at $175B in market cap, MSFT is at $268B; that’s a $93B difference, Google is 65% there…
If you look strictly at their enterprise values: Google comes in at $162B, MSFT at $247B; the difference falls to $83B, and interestingly, it’s still 65% there.
This however explains why Google will want to buy Facebook more badly than MSFT would: because as much as Google generates cash quickly, MSFT still generates it faster. Over time however, MSFT’s core business will slow down more so than Google’s will… so MSFT needs Facebook in the long run, while Google needs Facebook in the short run, to accelerate its chase of MSFT. In some ways this is counter-intuitive, but in the grand game of world domination, it makes sense.
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September 24th, 2007 at 9:09 am
[…] HipMojo has this to say about Google’s social networking efforts, including the rumors of a potential […]
October 20th, 2007 at 10:42 pm
Ever hear of google’s orkut?
October 21st, 2007 at 8:52 am
Of course I’ve heard of Orkut, but I’m not sure it’s much of a threat to Facebook.
In fact, Google had Google Video and still bought YouTube, the clear leader.
I suspect if Google takes on Facebook head-on (instead of trying to buy them), Orkut will be part of the mix but not the central, key tool in the assault.