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September 24, 2007

Facebook - is it worth $10 billion?

News from WSJ is that Microsoft is looking to take a 5% stake in Facebook for an investment rumored to be between $300-500 million. That would place Facebook's between $6-10 billion.

It's that last number that has people swooning -- how could a business that didn't exist just a few years ago be worth THAT much?!?!! Especially when a year ago, Yahoo! was rumored to be willing to pay $1 billion for Facebook.

Let's break it down. First, Facebook has significantly changed its business from a year ago. It now is open to anyone, not just college students. Moreover, the advent of its open platform means that it any developer worth his or her salt is writing a Facebook app.

This is a crucial point -- I wrote a year ago that  "as Facebook opens up and grows beyond its core membership of college students, it will have to replace the context of the college campus with content and experiences that people share". Today, I can find out where my friends have traveled, challenge them to a game of chess, or support them in their favorite causes. Facebook has created a platform and ecosystem that sustains and can grow the community that's there.

And grown it has. This past August, Facebook had 19 million monthly visitors in the US according to Nielsen Netratings, compared to 9 million a year ago. Facebook says that it has 42 million active users worldwide. At a valuation of $6 billion, those 30 million visitors are worth $142 a piece, and at a $10 billion valuation they are worth $238 a piece. That's lifetime value -- over the course of that person's relationship with Facebook, it's the belief that a member will generate that much in advertising and commercial value for Facebook.

Ad spending is roughly $2500 per adult in the US (about $250 billion in US ad spending divided by 100 million US adults). $200-$333 represents between 6-10% of ad spend. If people spend as much time as they potentially could within Facebook, those numbers are feasible.

Why an investment at this time? Facebook's ultimate goal appears to be an IPO, likely in 2009, because they want to solidify their business and advertising base. That means they'll need to buy time and a large amount of cash from a strategic partner -- or a large institutional round -- will give them the leverage to also make strategic acquisitions ahead of an IPO.

Two thoughts about why Facebook would want an investment with Microsoft. First, they already are working together. Microsoft sells the display ads that are targeted against profile information, and will make up about half of the $150 million in revenues Facebook will generate this year. This is part of a multi-year agreement that will extend until 2011. And Facebook's unique marketing value is that not only can the display ads be highly targeted at actual profile elements, but marketers can also develop a deeper relationship with Facebook members -- marketer relationships that Microsoft has in spades.

Second, Facebook needs to scale up a business that's both consumer-oriented and also developer friendly. Microsoft has excellent developer relationships and also knows a thing or two about how to build successful consumer (and business -- watch this space carefully) applications.

Microsoft's interest is obvious -- it wants a stake in one of the hottest companies out there. If they couldn't outright buy Facebook (they tried last year) they'll settle for a piece and make sure that no one else -- like Google or Yahoo! -- can be a part of the party.

Tags: Facebook, Microsoft, charleneli, ,

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Its not clear to me, whats in this for Microsoft if the rumour is true. They need cash flow in the billions, so such a small investment is not going to land that. If the investment is the cost of maintaining priority in the advertising on FB, then thats the only way this makes sense, provided they get some kind of exclusivity.

Tom O'Brien

MSFT investment in Facebook is exactly what Charlene said in the last graph. They need a stake in this space. Though seemingly expensive, MSFT's entire market value is threatened if they do not successfully make the transition from a PC software company to an internet application company.

Tom O'B

Michael Hickins

Charlene, I'm wondering if you've seen Joe Wilcox's blog on this rumor. I like his take that Facebook is like an operating system for the platform that is the Internet. It's at

Charlene Li

@Michael: I hadn't seen his post so thanks for the link. We make many of the same points, but I particularly like that he sees the value that Microsoft brings to Facebook, namely the "operating system in the cloud" expertise. Why shouldn't Facebook learn from the dominant application and platform developer on the planet?

mark ivey

Charlene--Nice analysis, but I think it's a huge stretch at these prices. The advertising model is far from proven. FB users or users of other similar sites haven't shown a propensity to click on ads or buy anything. And while they're adding tons of users (200k/day) it's unclear how loyal any of these will be, and whether in fact FB will be able to keep them happy and compete with whatever the next hot social media site is. I've watched many over 30 somethings join the site with mixed experiences--they have a long way to go to fully capture this crowd. As I said in my blog FB has enormous potential--if it can build a real business and advertising model. I want to see the proof first before hailing it as the new Microsoft (those comparisons to the early days of MS and DOS...another stretch).

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