Quick quiz: How does an Internet laggard catch up?
If you're Microsoft, you throw boatloads of money at the problem and buy your way in. The company according to the Wall Street Journal is in talks with FB to buy a 5% stake for $300 to $500 million. That would value the private company at $10billion or more. Microsoft may have to fend off Google, which has also shown interest in FB, and the FB owners may actually want more money (yes, $10b valuation is considered stingy). So it's not done till it's done. Yet the scenario says wonders about the state of the social media business--and raises fears that we're looking at hyperinflated model, ripe for a fall ("irrational exuberance" anyone?)
It's not that FB isn't valuable and social media isn't a force. FB is adding 200,000 subscribers A DAY, and social media is here to stay. There's momentum we haven't seen in years. FB pulled off some brilliant moves, opening the doors to developers in May to crank out thousands of new applications and paving the way for the post-college crowd to join--which it has, in droves. But the business (and advertising) model hasn't been proven, and it's unclear how much they can wring out of their members. This isn't Google.
FB's Mark Zuckerberg still needs to figure out how to monetize its product, and as Eric Hippeau, a managing partner of Softbank Capital, say in the article, "It's not that easy to monetize social media."
Right now FB is being subsidized by Microsoft, to the tune of $75 million a year. But when that deal runs out, as Hippeau points out, they're going to have to crank up the ad sales machine--and the advertising model is still in question.
Think about how you use these sites. Very few people click on the ads. They're in it to meet and connect with people, not to buy cameras, deodorant or a car.
The article points back to another hyperinflated model--GeoCities-- as a warning.
In late 1998, GeoCities was the third most-visited site on the Web, and it launched a successful IPO, valuing it at $1billion. The next year Yahoo paid a staggering $4.7 billion for it. Today GeoCities is tucked away in an obscure corner of the Yahoo site, a ghost of its former self (again, where is Greenspan when we need him?)
Now we're talking about $10 billion, a figure comparable to the GDP of Bolivia or enough to buy a WSJ subscription for every man, woman and child in Japan (see Wired's analysis)
Charlene Li makes a reasonable case for the lofty pricetag. The argument goes like this: Facebook recently had 19 million monthly visitors in the US (according to Nielsen Netratings), and 42 million active users worldwide, according to FB. Assuming a $6 billion valuation, those 30 million visitors are worth $142 a piece, and at a $10 billion valuation they are worth $238 a piece, she says. She points out that that's a "lifetime value," spanning the course of someone's life.
It seems to make sense that a person would spend well over $238 over a lifetime relationship. But so far, as I said, FB users or users of other similar sites haven't shown a propensity to click on ads or buy anything, and as far as loyalty...forget it...Hot sites come and go, and people could easily dump FB when the next cool site comes along.
Can FB avoid a replay of GeoCities? Hopefully, but the risks are there and sometimes greed can be your biggest enemy.
Zuckerberg's biggest risk might be in teaming up with Microsoft or any old tech titan. Some day FB's greatest asset is the "cool factor" and ability to attract the youth. That means continuing to crank out cool features and applications that help people connect and entertain each other in new ways.
David Bohnett, the founder of GeoCities, had some advice for Zuckerberg: invest heavily in new technology to "stay true to what the user experience is." And focus on the young audience: "Those kids tend to get older and maintain some connection with an online community. You've got to capture that early adopter, young audience."
Oh, speaking of young, Zuckerberg was only 10 years old when Bohnett hatched GeoCities. Excuse him if he missed the original stories--but he (and Microsoft) would be wise to consider the lessons from it today.