05/18/2012 01:16 pm ET Updated Jul 18, 2012

Why Facebook Is Worth Only $5.6 Billion

Given today is Facebook listing day I figured I had to add my pennyworth (again) to the whole "is it worth it" debate. I reckon the true value of Facebook is something in the order of $5.6 billion. Here is how I derive that figure.

First I take a stab at guessing what it costs to deliver A Facebook (i.e. the service that Facebook delivers to its users, rather than the service it delivers to advertisers). I reckon this is around $300 million. It is the costs for the server space and the techy maintenance. Now I know Facebook states it has much higher costs than this, but these are the costs associated within maintaining a business model that has to sustain a valuation of $100 billion -- not the costs associated with delivering the service to its users.

Then I add a respectable margin to that figure (say 25%). That gives me revenue of $375 million. Then put a 15x multiple on that and you get $5.6 billion.

Now, Facebook is already generating much more revenue than the $375 million I think it should be earning. So my figures are already wrong, right? Well go back to basic economics. In the long-term in functioning competitive markets, companies cannot generate significantly more for providing a service than it costs to deliver that service -- because that simply creates a window for a competitor to come in at a lower price. You can only break this rule by distorting the competitive framework in which you operate. Facebook is currently operating in a distorted market because there isn't a competitor and all the clever analysts haven't yet actually worked out a realistic model for valuing something like Facebook -- they all rely on a derivation of the old media platform model, forgeting that Facebook is not a media platform and its users are not an audience. Facebook is actually an infrastructure -- an infrastructure that cannot basically charge for the majority of the cost of that infrastructure because we already pay for it through what we pay to our internet service provider.

And as for competitors, they will come. And their competitive edge will come from promising users that they won't sell users' data. And they will be able to do this, because they won't need to sell the data, because they won't need huge revenues, because they won't have to sustain a silly valuation.

Therefore, if you place a bet on Facebook at its current price, you are betting on Facebook's ability to maintain a distorted market. Long-term, this is an absurdly risky proposition.

Long exposition on the value of Facebook and Google here.