Let’s Face(book) it, this time it is different

No it’s not !!!

Here we go again. Goldman Sachs drags up the mindless euphoria of the 1999 Internet bubble and makes a small investment in Facebook which indicates a valuation of USD 50bn. This is 25 times sales. When Google was valued at USD 50bn it had sales of USD 3.2bn, compared to Facebook’s USD 2bn, and a viable strategy to grow those sales rapidly.

And Facebook?

“Facebook is becoming like the telephone system,” according to a “the daily beast” commentator on Bloomberg, apparently justifying the stretched valuation.

Well here at Vox Sapiens we see this as a ridiculous overvaluation for several reasons.

We say that despite what many people, including purported experts, say, Facebook is not part of the Internet plumbing. Whereas Google seems to be do a reasonable job of making itself part of the plumbing. And Paypal is right at the center of it.

Imagine the Internet without Facebook. Not much of a change huh?

And without Google. Holy moley, we have to go back to using Yahoo for search. More of a substantial change for most people.

And Paypal? Well how many of you can name an alternative Internet-based payment infrastructure? And if you can, how often have you had the option to use it instead of, or in addition to, Paypal? Exactly.

Facebook users are fickle. One only needs to witness the decline of, in particular, MySpace to see this.

“Yes but Facebook is a better platform than MySpace, people can do more with it” goes the argument.

Well so what? History is bursting with examples of “better” technologies that failed. OS/2 was a better operating system than Windows, Betamax was a better video recording standard than VHS, many double-blind tests show a preference for cheaper private label products than for expensive market-leading brands.

And the cost of replicating the Facebook technical platform is such a small fraction of the valuation of Facebook that it can be considered negligible.

At Vox Sapiens we would like to propose “The Metcalfe Myth” – the value of a network is equal to the square of the number of nodes/participants in the network, even when the nodes/participants can transfer to a new network with minimal technical/operational problem and the economic cost to do so is negative or immaterial. In other words, we say that the validity of Metcalfe’s Law requires no feasible alternative network. But there are feasible alternatives to Facebook.

We propose that this hypothesis could be tested by:

  1. developing a clone of the Facebook platform – one that looks the same, and offers the same APIs so all the existing Facebook applications work on the replacement platform
  2. developing an automated migration script that transfers a user’s Facebook information, including links to any other user that also transferred
  3. offering every Facebook member USD 50 dollars to click the migration button and transfer

As Facebook is currently valued at USD 100 per user, this should pay out USD 25 bn to the users, create a replacement business worth USD 25 bn, and reduce the value of Facebook to zero. Except will the replacement business be valued at USD 25 bn after it becomes clear that the original Facebook was destroyed so easily? Because the process could be repeated again, offering USD 25 to each user. And again. And again …

Now this won’t actually work again and again because the compensation to move to a new social networking platform won’t exceed the hassle factor. But the point is clear – in Buffett’s terminology there is no economic moat around Facebook.

And the USD 50 bn valuation is absolutely ridiculous.

4 comments

  1. TheVoice says:

    Today linkedin.com announced that it has 100 million users (see http://mashable.com/2011/03/22/linkedin-surpasses-100-million-users-infographic/#), which is 20% of the number of Facebook users. But end-January 2011 valuation estimates were only around USD 2.5m (http://mashable.com/2011/01/28/linkedins-ipo-an-overview/#), which is only around 4% of Facebook’s. So apparently each Facebook members is worth approx. 5 times as much as a linkedin.com member. In other words, drunks and gamers are five times as valuable as business people???

  2. TheVoice says:

    The rumors about “Google Circles” – the much anticipated Google social networking site, are now completely rampant, and Google has resorted to denying that Google Circles will be announced at South by Southwest Interactive rather than denying the existence of Google Circles. If any company has the financial firepower, technological competency and access to web users that it will take to crush Facebook surely it must be Google.

  3. TheVoice says:

    Well not content with USD 50bn, we now have USD 65bn. CNBC reports (http://www.cnbc.com/id/41892971) that General Atlantic will buy 0.1% of Facebook in a deal that implies a total valuation of USD 65bn.

  4. Geezer says:

    So your hypothesis is to create “copybook.com” 🙂

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