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Closing the Facebook Value Gap

What is Facebook’s business worth? An interesting question brought into focus by the impending Facebook IPO and it’s surrounding media frenzy. A lot has already been written but I’ll add my thoughts before the opening bell.

A recent poll showed that the American public was nearly evenly divided over the 100 billion dollar valuation of Facebook. Which suggests it is fairly priced. Even experts seem to be split though most seem to be leaning towards overvalued. One way of looking at the valuation is through the lens of its users.

At a 100 billion dollar valuation, each Facebook profile is worth approx 110 dollars. Using the latest revenues of 3.7 Billion for “face value”, each profile was worth approx 4 dollars.

This 106 dollar “value gap” needs to shrink considerably or Facebook needs to convince Wall Street that it has a plan to shrink the gap - otherwise face a major selloff from a loss of confidence.

Facebook’s challenges lie not just in growing it’s user base but in increasing the value of that user base (without losing it, or spending much more to get it).

Interestingly, this is much the same challenge that the telecom companies have. Telecoms have an audience with high switching costs in a saturated market. They have become a “dumb pipe” of wireless information and are now struggling to become more than that even as next-gen companies are being built using those pipes.

Telecom’s big mistake in the early days of the battle for the mobile web was in constructing “walled-gardens” from which it directed users to buy stuff (remember the AT&T Store?). Of course this didn’t work because the telecoms could never provide the full variety of the web experience which is what users wanted and so people never used them. The telecoms also never thought to create a piece of hardware that could browse the web while mobile, or use the network they owned. They didn’t think it was their business. Apple eventually cracked that problem with the iPhone and promptly built the ultimate open-platform walled-garden of its own, the App Store, and dictated conditions that the industry now openly regrets.

Facebook’s biggest hurdle is the fact that it is effectively a walled garden on the web - what Facebook users do outside Facebook is largely unknown to people who advertise or build onto Facebook. Social Graph was an attempt at breaking this silo down but the social graph is opt-in by the user (you need to “like” an article on CNN for example) and therefore not very robust for deep data mining.

That leaves Facebook to live or die on its ability to turn itself into a platform so vast and deeply integrated in peoples’ lives that it effectively becomes the new web. The good news is the first step has been taken; most apps developed for the iPhone or Android already demand a Facebook sign-in to leverage the users’ existing social network. The biggest risk for Facebook is they stall out and become uncool - MySpace has shown us what that looks like already.

What’s cool about Facebook is not Facebook but that my friends are with me everywhere I go. As many have said, figuring out mobile is absolutely critical for Facebook - and players like Path have a head start. Facebook can’t buy all the Instagrams that crop up so they will have to own it eventually. Then there is the question of monetizing mobile in a way that doesn’t destroy what makes it cool.

It makes me wonder if Facebook is at the same crossroads as the telecoms - knowing what business they are really in will determine if you can avoid becoming the world’s next commodity. If Facebook can eventually own an end-to-end mobile experience that delivers truly “happy, unscripted moments” that are both social and commercial, Facebook’s valuation at 100 billion dollars may be very low.

There is far more at stake here than Facebook because as Facebook goes, so will the fortunes of all startups - the fortunes of web 2.0 really. The startup world of silicon valley, NYC, Shenzhen are highly inter-connected in unexpected ways. If Facebook ultimately disappoints, we will all look back and shake our heads at the famous line in the movie “the social network” - “you know what’s cool? A billion dollars”, and call it the great second bubble.This would be deeply unfortunate.

I’m really rooting for you Facebook.

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