Facebook – how will they make it worth $100 Billion?

I often read a good blog about personal finance and passive investing.  In it there’s been a recent post about the impact of the Facebook IPO will have on index trackers and people’s exposure to the Facebook floatation. Some of the comments, quite rightly suggest that this is reminiscent of the dot-com bubble of the late 90′s, from which there were some very high profile casualties.

When the markets are valuing companies, it’s very difficult to do so when there are no similar companies around to benchmark against. As a result, the valuation becomes heavily  dependent upon good-will and “hope”.  This is where the heart starts ruling the head.

Looking at the Facebook IPO objectively, and from having a reasonable knowledge of the Internet, Google and on-line marketing I find it difficult to see how, in its current guise Facebook can be currently valued at $100 billion.  To explain, I’m probably best using a few analogies of how I see Facebook within the internet and also compare to where Google sits.

The Internet is a communication medium first and foremost – a method for businesses and individuals to pass messages around. In this manner, it can be seen as a replacement for radio waves or television broadcast signals.

To bring order and control out of the information on the Internet, Google came about becoming the search engine of choice for people looking for information. This information was in the form of websites originally and now includes all forms of documents, media and other information formats.

Bulletin boards and forums brought together people with similar interests, with large providers offering a number of different “channels” to allow communication for large groups of disparate people.

Now, there is Facebook – what I believe to be a social platform for people to spend their social time via the Internet.  In times gone, the equivalent may have been the “mall” or other areas where people congregated.  In this example the mall or shopping centre made it’s money by selling space to retailers who in turn sold goods to their customers.  This is where I believe Facebook have positioned themselves to make money.

Whereas Google’s role was to act as a business directory, and service finder, Facebook is the destination for people to socialise online. To convince businesses to pay money to have a presence on Facebook is going to be a challenge as most people will be using Facebook purely for social reasons.  Therefore Facebook needs to come up with a way of encouraging their social users to actually start spending money whilst on Facebook to buy goods and services.

This is already being done using on-line gaming, allowing extras to be purchased for “real money”.  But rather being an online arcade store, how does Facebook intend on getting into the real earning?  I think this is probably going to be in a similar way to how Google is becoming a middleman. Facebook will look at charging commissions on goods and services sold directly from within it. Facebook allows you to use your account to sign into different websites – if you are signed into Facebook and you buy something using a facebook account, then facebook will get a snip of that price.

This is a very different model to that currently employed by Facebook which is more akin to Google Adwords.

Facebook will change the way online advertising is both delivered and how income is derived from it.  Facebook allows for very detailed social targeting of different groups and is currently building up buy profiles of each user by allowing them to “like” brands or products.  This will ensure that future advertising is extremely targeted and cost efficient compared to the pretty loose approach of blanket advertising that Google uses now.

By using commission led and socially targeted advertising, Facebook may quite possibly exceed the $100bn valuation placed on it within a few years.

 

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