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Henry Blodget

Henry Blodget

Posted: April 26, 2010 10:25 AM

Whoops -- Facebook Is Once Again Overhyped

What's Your Reaction:

Eleven months ago, the world had written off Facebook for dead.

As we described in a May 2009 post, the common "wisdom" about the company in those days included the following:

  • CEO Mark Zuckerberg's a naive control freak.
  • The ad inventory is lousy
  • There's no real business model
  • The new design sucks
  • They're hemorraging cash
  • They're running out of cash
  • They've searched the entire globe for cash
  • They can't recruit anyone and employees are leaving in droves (because Mark Zuckerberg's a naive control freak)
  • The valuation has plummeted from15 billion to2 billion
  • Crazy Mark Zuckerberg just rejected200 million at an8 billion valuation

The point of our post was that Facebook was ridiculously underhyped. What the critics failed to notice a year ago was that Facebook was, slowly but surely, taking over the world.

Well, now it's 11 months later.

Facebook's critics have seen the (colossal) error of their ways. And Facebook has gone from being underhyped to justifiably hyped to, once again, overhyped.

Check out some recent headlines:

And it's not just the headlines. It's the reaction among the digerati these days whenever anyone has the temerity to suggest that Facebook is NOT going to swallow the Internet, destroy Google and Microsoft, and become the most valuable company in the world. (Ridicule and disgust.)

Well, count us among those who think that Facebook's size and market power is nothing short of awe-inspiring. We were believers in the company a year ago, when the supposedly smart money was saying that Facebook was toast, and we're believers today.

We think Facebook will build a big, profitable business and will continue to revolutionize the way people share information and communicate. We also think Facebook will create enormous problems for remaining incumbent "portals" like Yahoo and other display advertising companies.

But...

We are not yet sold on the idea that Facebook will quickly become a $10-$20+ billion revenue juggernaut that will show Google a thing or two about what it means to coin money. We're also not convinced that Facebook is obviously worth the $25 billion valuation the private market is placing on it.

Why not?

Because, if our information is accurate, the company has just north of $1 billion in annualized revenue. That's with a user base of 500 million people a month. That's just not a lot of revenue considering the humongous size of the user base. In fact, it's downright paltry.

Now, the counter-argument here is that Facebook is only now beginning to think about revenue. Google didn't think about revenue in the early years, and now look at it. And so on...

And that's reasonable. But in the past 15 years, the world has learned a thing or two about the types of online businesses that generate huge revenue online...and the types of businesses that don't. And, for the most part, Facebook still resembles the kind of businesses that don't.

At its core, Facebook is still a social network. It is about people communicating with people. With the exception of direct subscriptions (a la telephone and wireless companies), monetizing people communicating with people has proven difficult.

Yes, you can advertise to people communicating with people. And Facebook's self-serve ads and humongous traffic certainly make it an interesting and powerful advertising platform. But Facebook has been selling ads for a while now, and its ad revenue isn't blowing the doors off.

Why not?

Because, dare we say it, despite the amazing level of targeting possible with Facebook's self-serve ads, Facebook's ad inventory just isn't that good. Again, Facebook ads are placed next to people trying to communicate with people. And people communicating with people just aren't a particularly target-rich environment for advertisers.

What is a target rich environment? People looking for products. That's Google. That's why Google can generate so much more revenue per user than Yahoo, AOL, Facebook, Twitter, and all the other huge sites out there.

Could Facebook build its own search engine and kill Google? Could it team up with Bing and crush Google? Yes, hypothetically, it could. Anything's possible. But killing Google would be easier said than done, even with Facebook's huge user base. (500 million people already use Facebook every month--and Google is still cranking merrily along).

Now, Facebook has other potentially huge revenue streams, too. Like payments. Facebook now takes a huge 30% commission on all the virtual stuff people buy from participating game platforms using Facebook payments. And given the amount of virtual stuff people are buying, Payments could quickly become a big revenue stream. But not, in our opinion, $10-$20 billion big.

For examp, we hear that Facebook may want to try to kill PayPal and take its payments system global and have people use it to pay for everything. And maybe Facebook will be able to do that. But it's worth noting that, 10 years after it began to take over the world, PayPal is now only a $3 billion business. And killing it may be harder than some Facebook boosters think. Especially because there are few other companies out there that might want to kill PayPal, or at least take a piece of its business. Like Apple, for example.

Are there other huge revenue streams that Facebook hasn't even begun to think about yet?

Yes, possibly. But the same can be said for most companies. We'll keep an open mind, but for now we'll just point out that we haven't seen them yet.

But wait, won't Facebook grow in the future? Won't its user base grow from 500 million people to, say, 2 billion people? Yes, probably. And if the next 1.5 billion users are as valuable commercially as the existing 500 million (highly unlikely), then Facebook's revenue might rise to $5 billion. And that's big. But it's still only 1/6th the size of Google. And, likely, far less profitable.

So, bottom line, we continue to think Facebook will revolutionize the world, and we couldn't be more bullish about the company's ability to change the way people communicate and share information. But we're still not sold on the idea that Facebook will become as big and amazing a business as it is a cultural phenomenon.

Don't miss: How Steve Jobs Got Sick, Got Better, And Decided To Save Some Lives

 

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