Opinion: There are 33 million students in the United States alone, and that number grows every August. It's not just a social networking site. It's an extension to existing social institutions.Two billion dollars is a lot of money.
But that's the magic number, as reported by Businessweek, that you'll have to pony up to buy social networking site Facebook. The company, which is less than 2 years old, has apparently already rejected an offer of $750 million.
There are a lot of issues at play here: Is Facebook worth $2 billion? How do you know? Is that price indicative of another Internet bubble? Is the article itself just well-placed PR? What's the business plan? Who's on first?
These are all good questions, and they need to be asked. But before we touch on them, let's put $2 billion into perspective.
A lot of folks have said that Facebook's exorbitant asking price is indicative of a new Internet bubble. Maybe they're right.
Two billion dollars is more money than all combined investments in dot-bombers etoys ($166 million), pets.com ($82.5 million), kozmo.com ($280 million), flooz ($35 million), boo.com ($160 million), and mvp.com ($65 million).
Even if you throw in the top market valuation of webvan, $1.2 billion, you don't quite equal the asking price for Facebook.
Of course, those were investments, not acquisitions. So let's compare Facebook's asking price to recent acquisitions.
Two billion dollars is about 20 times what Google paid for dMarc ($102 million) and Yahoo paid for Musicmatch ($160 million), and about five times what the New York Times paid for about.com ($420 million). The inevitable comparison is MySpace, which sold to News Corp. for $540 million.
Is Facebook Worth $2 Billion?
The short answer is, I have no idea.
But the longer answer is an interesting exercise in figuring out how to evaluate the company. (If you'd like to judge the CEO and one investor for yourself, check out this video from a talk they gave at Stanford last October.)
Now, I never went to business school (that's what I get paid the big journalist bucks), but from what I can tell, prospective buyers evaluate potential acquisition targets by revenue, projected revenue growth, number of customers or users, user retention levels, conversion rates (did they buy anything? Did they buy anything from the advertisers?), and profit.
I'm not privy to Facebook's financials, but here's what I know: They were cash flow positive last year, and they took a VC round of $13 million from Accel.
As of October 2005, Facebook had 5 million registered users and was signing up 20,000 new users per day. The site covers 45 percent of U.S. colleges, which represent 8 million students. These are amazing numbers.
Perhaps most amazing is the fact that 93 percent of its users visit at least once per month.
According to a report in the Journal of Marketing Research in 2004, user retention is perhaps the most valuable statistic for an online destination. The study authors correlate every 1 percent increase in retention to a 5 percent improvement in company value.
Now, take those numbers and add the fact that Facebook has become the de facto standard for university networking.
According to the site's terms and conditions, it also allows anyone over the age of 13, the year most kids enter high school.
How many potential users is that? Well, there are 16,791,000 high school students and 17,383,000 college students in the United States alone, according to government census data released in October 2005. And Facebook has made no secret about going worldwide, either.
It's easy to imagine high school and colleges incorporating complementary (or even mandatory) Facebook accounts.
It's even easier to imagine businesses using Facebook to recruit students.
Think about it this way: What if students knew their chances of being hired by a company out of college increased when they signed up for Facebook?
There's Room for Facebook and MySpace
But so what, you say. Facebook is nothing but a smaller, sanitized version of MySpace, right?
No, the two sites are completely different. While they're both technically "social networking" destinations, they appeal to different users.
It doesn't take a capacious imagination to understand that students might want to keep their "professional" Facebook profiles separate from their MySpace profiles.
Facebook also grows differently than MySpace does. MySpace became cool by limiting users to 18 and over.
Facebook asks everyone 13 and under to join. MySpace allows you to personalize everything. Facebook does not. MySpace allows fake profiles. Facebook does not.
Facebook is connected to real-world institutions. MySpace is connected only to the fleeting notion of cool.
Facebook's challenge is to incorporate itself into those institutions. MySpace's challenge is to get its users so involved in the community that it becomes too difficult to switch to another service.
Facebook is not an identity production site. It's more like an online good ol' boy network.
In the end, Facebook's greatest strength is its ever-replenishing source of users, hundreds of thousands of which arrive on campuses every August.
Just think about that for a minute. What if you could write into your business plan "700,000 new users every fall."
It sounds like the company has a good business plan to me. There may be a degree of Web 2.0 hype out there, but you shouldn't count Facebook as part of it.
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