Mark Ritson: Facebook’s $104bn bubble is set to burst

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Facebook’s debut on the Nasdaq on Friday meant that the largely positive and optimistic vision held by marketers has been supplemented with an entirely different, and I would argue more critical, perspective from the international investment community. The $104bn question is whether the brand is worth anywhere near that.

In terms of the oldest media metrics of all – reach and frequency – this new media brand is certainly a phenomenon. It’s not the 900 million members that Facebook can reach that truly blows you away, but rather the sticky nature of the site which ensures that a massive proportion of them are visiting on a daily or weekly basis.

And with the exception of China, where it does not yet operate, Facebook has become a truly global brand growing with the same relentless efficiency in almost every market.

Its brand equity is equally impressive. The newly published BrandZ 2012 league table confirms that Facebook has a brand worth in excess of $33bn and it is growing faster (74% in the last year) than any other brand in the top 100.

A huge brand, with an enormous global market share and incredible growth. If we end our analysis there, the $104bn price tag makes perfect sense. But the marketing audience is too easy to please. The more critical appraisal of international analysts is now revealing a more complex case against such a huge valuation.

To understand why Facebook is clearly not a $104bn company you have to start with a more accurate comparison than McDonald’s. If you compare Facebook with WPP, for example, the scale of Facebook’s exaggerated value becomes apparent. For all the hype, Facebook’s 2011 revenues of $4bn were a quarter of WPP’s. And yet Facebook’s new valuation means it is apparently worth seven times that of Sir Martin Sorrell’s organisation. To put that in perspective, Facebook started trading at 70 times its earnings of the past year, while WPP trades at a more realistic 12 times its earnings.

The only way Facebook can justify such an enormous disparity would be by demonstrating a huge future growth potential and specifically a surge in the advertising revenues that provide 80% of its income.

But Facebook’s revenue growth is slowing down – eMarketer, the independent analyst of social media brands, estimates that Facebook will increase its advertising revenues by 60% this year, which is significantly less than 2011’s growth figure and way below the kind of growth needed to justify Facebook’s current valuation.

By 2014, eMarketer expects Facebook to generate $7.6bn in advertising revenue – barely 10% more than 2013 and still only half the revenues that WPP is likely to generate.

And all those projections were made in January before Facebook reported Q1 revenues that had declined from the previous quarter. As Lee Simmons from Dunn and Bradstreet puts it: “The larger question is how the company plans to reverse its slowing ad revenue trend. Facebook still offers tremendous value to advertisers, but the investor who sees three straight years of slowing revenue growth would rightly pause for a second look.”

More optimistic investors stress that Google faced similar questions during its initial growth spurt and IPO in 2004. “When Google went public, it had only recently developed ad products,” points out Rebecca Lieb, an Altimeter Group analyst. “Facebook is at the beginning of mobile products, advertising products and it hasn’t even started with commerce products.”

But Facebook is an entirely different digital beast to Google and it’s clear that, for all its popularity with users, Facebook finds itself in an altogether more difficult place to sell advertising. All the crap about brands being like people and people being brands that Facebook spouted earlier this year cannot mask the fact that it is a site for people to connect with people and where brands, unfortunately, are the third wheel.

A man looking for a new fishing rod is delighted when Google helps him find the best model. But a man catching up with friends does not want Facebook to start telling him about fishing rods, even if he did post a picture from his last angling trip on the site a week earlier.

Google is about search. Facebook is about people. And that model is much less effective for advertisers. As Pace University marketing professor Larry Chiagouris puts it: “The Facebook IPO is likely to be a disappointment to all the new investors. This is because its real financial value is tied to its marketing value, and Facebook is of very limited value as a marketing tactic.”

The $104bn valuation and wide-eyed belief that Facebook was somehow going to supplant traditional approaches completely will be a passing fad. As Facebook’s value goes down in the months to come, I can only hope the same trajectory will take place within the marketing community. It’s just a shame that we needed financial analysts to prick Facebook’s bubble and accurately question its marketing potential for us.

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