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Is Facebook Really Worth $100 Billion?

On February 1st, Facebook announced an initial public offering that may be valued as high as $100 billion

Can an infant company, founded by someone who is barely out of infancy himself, really be valued, in the eyes of investors, at such staggering numbers? Its pure numbers ($1 billion in profit on revenue of $3.7 billion in 2011) do not justify it, but its value may very well be justified for the simple reason that it offers so much that so many people want. Forecasters predict that Facebook will soon pass the one billion user benchmark; that represents one person of every seven in the world.

The attraction is across the board for users, with the socially adept and connected using it constantly to socialize with and update both old and new (made on Facebook) friends.  Busy people may not log on every day, but they find it an excellent way to stay in touch, share news, see and share photos, etc. with a wide group of friends and relatives, easily and quickly.

But none of these things makes money for Facebook and therefore cannot explain away a price tag of $100 billion. What makes Facebook so valuable is what it knows about its users.  Facebook’s primary revenue so far is advertising and it can do this so well because of all of the user data it has mined.  To paraphrase Santa Claus: it sees you when you’re sleeping, it knows when you’re awake, it knows if you’ve been bad or good; since it knows its customers so well, it easily targets them with ads for exactly what they want, often before they know what they want.

King Of Social Media

Facebook is also the king of social marketing, a field which Google has now belated tried to penetrate with its Google +. Recommendations by friends or like minded strangers are more much more influential than cold advertising, no matter how well targeted. Music, movies, and recently even products are recommended by this so-called social commerce and probably accounted for $5 billion of Facebook’s revenue. This will only grow as Facebook finds more ways to exploit the information they have on their users.

The big danger that Facebook (and consequently the investors in its IPO) face is that it may be exactly this data mining that will turn off and tune out its users. Privacy issues are becoming a real concern, not only by users, but by regulators, both in the United States and abroad. Limitations on the amount of information obtained, the way Facebook obtains it, and most importantly, the way it uses it, may cut into its advertising power and eventually, its advertising revenue.

 

If you are feeling inspired by Facebooks success, you might want to check this site. Hiring someone to help you build a website can be risky if you don’t do a background check first.

Image Credit: trogers555Eveline314

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