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Let's Justify Facebook's $300-Per-User Valuation

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Some quick math makes Facebook’s $15 billion valuation look even crazier. Apparently the guys over at Silicon Valley Insider also bothered to crunch the numbers.

  • Bebo sold to AOL this morning for $850 million and have about 40 million users, costing $21.25 per user.
  • In July 2005, News Corp. purchased the parent of MySpace for $580 million. At the time, MySpace had about 21 million users, costing $27.62 per user.
  • Those are as direct as we can make it, but let’s say we bring out a crazy deal where the buying company admitted they overpaid. When eBay shelled out $4.1 billion for Skype, it paid about $52 per user.

Admittedly Microsoft has plenty of money and probably didn’t worry too much about the valuation when agreeing to terms with Facebook, so we’ll raise our estimates a bit. Also, Facebook has shown an unwillingness to sell or go public, indicating that it’s building for the long haul, meaning its users could grow in value over time. But at the time of the Microsoft deal, Facebook had about 50 million users who were valued at $300 each. Readers, care to tell me how Facebook users can achieve that value?

Kara Swisher has her own math on the Bebo deal as well.

52 Responses to “Let's Justify Facebook's $300-Per-User Valuation”

  1. My profile can’t be worth so much. After the privacy issues people experienced on Facebook, I loggued in and erased all personal relevant information. Political, films, personal information, …. as well as nearly all my third party applications.
    I’m just keeping a profile on FC to stay in touch with some friends.
    Can’t be worth vey much.

  2. Satinder

    I agree more with the theories of Mr Roy Howard.

    “Microsoft paid money to Facebook for two things: 1) rights to exclusive advertising on Facebook globally and 2) a small equity stake. The next investor in Facebook will not get rights to the billboard space that Microsoft does. The next investor will absolutely pay less because they will get less potential upside.”

  3. booookworm

    so its agreed!! the $300 is not entirely justifiable from a cost per customer acquisition point of view. But from a strategically defensive move to gain more advertising space, strengthen the anti-google alliance, and present others from moving on FB, this deal might not be worth $240m to another company, but it certainly was worth $240m for MS!!

  4. Please name the investors who have bought stakes in Facebook at a $15b valuation and then we can talk about how ridiculous that is.

    Until I see an article that says definitively that someone invested at that valuation, it is all BS and the media keeps hyping on the number they magically arrived at by purposely excluding the fact that Msft was buying advertising rights just like Google did with MySpace.

    Maybe the media needs to be more responsible.

  5. That figure is just ridiculous…All this hype about social networking will die out soon in a year or two. All media/tech startups are overvalued and will fall as a result….a coming tech debacle…!

  6. The level personal information provided for each user on facebook far surpasses the level provided on any other social networking site. Because of this highly detailed information, advertisers can more effectively tailor ads for each user. This makes the per user value far higher than any other social networking site. If you take into account that the user information on facebook is much more likely to be accurate (and not full of Tila Tequila’s), the value increases significantly. I personally haven’t crunched the numbers, but I don’t think $300/user is out of the question.

  7. I think you are also forgetting one crucial component of the deal…
    Microsoft purchased the share in Facebook.
    Not Yahoo. Not AOL. Not Fox Media. And more importantly, not Google.

    This is a deal about potential, about advertising revenue, and about keeping a company out of the hands of the competition.

  8. Roy –

    You’re exactly right. Microsoft ponied up some cash mostly for the chance to put their ads in front of Facebooks very targeted demographic. The small stake in the company was not the main focus in the deal at all. And I really don’t think that it reflects the value of Facebook in totality.

    And today we’ve seen AOL do the same thing with Bebo. AOL, like Microsoft, is apparently shifting at least part of their business model to become an ad company and they need to get as many faces as possible to look at their ads.

    Just like when MS infused all that cash into Apple years ago, it wasn’t to help save Apple or too even get some sort of a stake in the company. It was to make sure that there was one more outlet that MS software would be available on. Same game, different players.

  9. “You could look at it this way: A Facebook user, especially those that joined earlier on, is more likely to have some college education. The more education you have the higher your expected lifetime earnings are, thus you buy proportionally more stuff than your uneducated counterparts.

    Is the difference in quality of user real? I don’t know. Could the value be there in the future? It’s worth betting on.

    This is what I used to think. Until I realized that the digerati and ‘intelligent’ people don’t actually spend much money. They are smart enough to google their way into the freest or cheapest offering in the world. It’s the dumb stupid people (ie. myspace users) that pay more per transaction for stuff as they don’t know how to google properly and get those cheaper mortgages…

  10. Microsoft paid $ 20 per user to keep the users.
    That is in the same ball-park as Bebo and MySpace
    per user valuation.

    Rest to prevent two guys (Sergey and Larry) from
    setting up profiles on Facebook.

  11. Curtis —

    I agree, my analysis is rooted in flaws… I don’t have the terms of the deal. I don’t know exactly what they agreed upon. I can tell you, though, that to look at it just as an equity deal is even more flawed. Microsoft paid money to Facebook for two things: 1) rights to exclusive advertising on Facebook globally and 2) a small equity stake. The next investor in Facebook will not get rights to the billboard space that Microsoft does. The next investor will absolutely pay less because they will get less potential upside.

    Say I sell my iPod to you for $200. I get my price, I can say I sold the iPod for $200. You’d say you bought an iPod for $200. Easy.

    If I sell the same iPod for $200 and I throw in a $100 iTunes credit, I can still say I sold my iPod for $200 and be technically correct… but you’d say you bought the iPod for $100 and you got a $100 iTunes credit.

    Microsoft bought traffic… and they did it because Google had bought traffic just a few weeks before and set a precedent. They didn’t want to lose all that ground. It wasn’t a piece of Facebook they wanted, it was the eyeballs.

  12. You could look at it this way: A Facebook user, especially those that joined earlier on, is more likely to have some college education. The more education you have the higher your expected lifetime earnings are, thus you buy proportionally more stuff than your uneducated counterparts.

    Is the difference in quality of user real? I don’t know. Could the value be there in the future? It’s worth betting on.

  13. I think the MS/fb analogs divert attention away from some key metrics that ought to be important:
    – what is the user acquisition cost for fb/bebo/hi5/myspace? I would guess a fraction of a cent/user
    – what is the current cost (infrastructure/bandwidth) of servicing the user? I guess a few cents/user.
    – what is the current monetization possibility per user ?
    – what is the potential monetization per user ?

    The ratio, imho, of monetization per user to acquisition+operation cost per user looks like a useful metric to compare for all the social networks being talked about here…


  14. To be honest, I don’t think $300 is reasonable by any means. However, if you compare a Facebook user to a Myspace user, the likelihood that a Facebook user’s account is fake has a much lower probability. Myspace may report 80+M registered profiles, but how many of those are fake celebrity profiles, marketing platforms for web cam girls, etc. I personally have two. One is where I develop on (hacking up that CSS).

    Facebook knows its users are real, and are less likley to lie about important profiling data in fear that their classmates will call them out on it. On myspace, I can say whatever I want because nobody close to me is in my network. Targeting ads is easier, and maybe Facebook has an edge because of that…

  15. @Roy,

    Your analysis is flawed simply because the MS deal involved equity, which set Facebook’s value per share. Perhaps they received less equity for the exclusive rights to advertising. Perhaps they have future investment options. Perhaps… whatever. Microsoft invested $240 million for a 1.6% stake, thereby setting Facebook’s valuation at $15 billion. This is irrational investing at any investment level.

  16. No. The $15b was pulled out of Zuck’s a__ months ago. It was completely made up. He said it was a random amount. Further proof that fb and their investors are high.

  17. Imho a cunning strategic invest. A small price to pay for locking out, or making life difficult and immensively expensive to potential FB suitors by setting an impossibly high bar.

    Advertising exclusivity and other factors come in as handy extras.

  18. surfmavs

    you are right companies hate to do down rounds, and it should be a key consideration when a startup does a typical round, but this does not apply in this case. this deal is so far outside of a typical venture deal its not even funny. it should simply be viewed as an opportunity for FB to raise an absolutely massive amount of money for cheap. now they’ve got it, and the next step is an IPO where either they may or may not pay off the $15B valuation…it really doesn’t matter (except to MS who clearly has other factors in mind). from an FB perspective the warchest increases the chances of a great payday for them and their early investors…MS IRR may be an entirely different story.

  19. Stacey Higginbotham

    You guys are right that Microsoft was buying a stake and likely had few cares with regard to valuation. But if Facebook raised additional money at that same valuation (comapnies hate to do down rounds) then someone else is expecting the company to achieve those exalted levels. That’s a big reason why comapnies should aim for a reasonable valuation.

  20. As many have pointed out, Microsoft didn’t invest at a $15 billion valuation. They gave Facebook a payoff and, in addition to advertising concessions, got some stock tossed in as a kicker.

  21. Hold on a sec.

    Like some others have said, the money Microsoft invested was for a 1.6% stake in Facebook and for the right to advertise on the site. To figure out the valuation per sub, you have to extract the value of the advertising portion from the overall deal.

    Google paid $900mm for 3 years of exclusive advertising on myspace and got no equity in myspace. At the time, myspace had 100mm users. So that’s about $9 per sub at the time of the deal. Based on the fact that Google is struggling with social networking monetization and myspace is thought to be the chief problem, this was probably too much.

    Microsoft already had the rights to the domestic facebook advetising through an earlier alliance signed. They paid $240mm for exclusive advertising on a global basis with no stated timeframe limitation, though I’m sure there must be one. Let’s give them the benefit of the doubt and say it was a 3 year deal also and lets say it negated their earlier deal on the domestic market. If so, Microsoft paid $240mm for 50mm users… or about $4.80 per sub. AND they walked away with a 1.6% stake in facebook.

    In fact, Microsoft paid far less for facebook advertising rights than google paid for myspace advertising rights. It’s not a $15 billion dollar idiotic move. Admittedly, it’s really a payola move — they’re buying advertising revenues — I don’t love that as a business practice. But if what Microsoft was trying to do was shore up their faltering online business, it’s not the worst thing they could have done to goose the top line.

    Buying Yahoo… that’ll probably be the worst thing they could have done.

  22. Not that I think it’s reasonable by any means, but I can see Facebook being valued somewhat higher because it’s a much more targeted audience (i.e. for ads)…college students and those that just graduated college. And there’s lots of personal information in different forms (text, pictures, etc.) tied to specific users that something like the EBay-Skype deal doesn’t involve.

    All that said, it’s still ridiculous to say any of that makes it even remotely close to $300 a user.

  23. Stacey,

    I would say that $300 per user for any media company is an impossible value to achieve historically. I did a media research project about 2 years ago which looked at the historical changes in media due to the impact of new technologies. Valuation of the media companies was a small component of that research, particularly the loss in value of a media type when a new media technology emerged. Of note, none of the media companies had a per user value in the $300 range. In fact, none were very much more than about $130 per user at peak valuation. Unfortunately, I cannot provide a link to the research as it is confidential, however I will note that Facebook’s so called $15 billion dollar valuation is idiocy at best. It has no historical benchmark as validation, nor does Facebook’s revenue growth and run rate (as reported publically by the media) justify such a lofty valuation.

    Just remember GeoCities and Facebook is in good company. ;-)

  24. I was under the impression that Microsoft paid what they paid because they wanted access to be able to place ads on Facebook, not merely to own a small percentage of the company. They were getting a portion of the company AS WELL as, if not more importantly, the ability to serve ads on the network. I felt that the payment was so high because of the access to ads, not the percentage of the company they owned. Silicon Valley then jumped all over it and declared that Facebook was worth $15 Billion. A gross exaggeration by even an asylum resident. I doubt any other company would be allowed to buy a percentage of the company AND place ads after MSFT ran in there.

  25. As far as I can tell, the whole $15B valuation is based solely on an extrapolation of Microsoft’s investment in FB, however Microsoft itself has stated that the amount invested was not simply a purchase of a percentage of ownership, but rather it reflected numerous other factors (placing ads on FB being the biggie).

    With that said, it seems to be a mixture of PR and the ‘next big thing’ that keeps that number floating around. The business press isn’t helping either, with Zuck being called the youngest billionaire based on his guesstimated percentage ownership of a guesstimated valuation :-)

  26. I don’t know anyone who thinks that Facebook is, or ever has been, worth $15B. I admit that I’ve never gone into an asylum to ask the question, but I am on the web a lot…
    I don’t think that anyone at Microsoft was smoking so much Redmond reefer that they thought it was worth $15B. They bought a significant stake at a price they thought that stake was worth to them. That’s a long way away from considering Facebook to be worth $15B.
    So it’s misleading to suggest that Microsoft paid $300 per Facebook user.