Will facebook live up to the hype and deliver for investors?

Facebook’s increasing popularity means media companies are keen to invest as much for the knowledge they can glean as for the profit

At a media gala dinner earlier this year, I found myself sitting next to a retired executive – an ex-business leader who had seen and done most things in the world of business, especially marketing and advertising.

We got to talking about how he keeps himself busy in “retirement”, and it turned out he was probably busier than some current executives, as he holds several non-executive directorships, including one on Yahoo!’s board.

I asked if the unconfirmed reports of a Yahoo! bid for social networking site Facebook, six months earlier (September), were true, and he said the board had looked at Facebook, but felt 24-year-old founder Mark Zuckerberg was asking too much. The price reportedly wanted at the time was in the $1.5bn (£750m) range.

Last week, Facebook’s Zuckerberg was the unseen star of Sun Valley, the annual high-powered conference of media moguls and executives in Idaho organised by Allen & Co. Last year, the excitement at Sun Valley was about video-sharing site YouTube, and who would buy or sue it. As we know, Google did buy and Viacom sued. This year the talk is about whether Microsoft can succeed where Yahoo! stumbled by buying Facebook, and if Facebook can overtake MySpace.

You feel the reality of Facebook’s growing influence even on a personal level – in the past few weeks I have received at least one e-mail a day from a friend or ex-colleague asking to be my Facebook friend. I’ve had a journalist account on Facebook for nearly a year with little or no activity other than to see how Facebook works, but now things have really taken off.

One reason for the new activity is that Facebook was previously only open to students with a university or college e-mail address. But in September, around the same time Yahoo! was supposed to have been sniffing around, it opened up the site to all comers. Yet in Silicon Valley, the most important move Facebook made was to go “anti-MySpace” by opening up its platform to hundreds of developers, to create or license applications so users can integrate them into their pages.

Valley dwellers call it anti-MySpace because the larger social networking site, owned by Rupert Murdoch’s News Corp has restrictions on third-party companies building applications on the MySpace platform, though that is changing. Applications like video, text, instant messaging and other features are being added regularly to Facebook. The idea is for users to spend more time on the pages and to turn Facebook into a more central hub for content, like Yahoo!.

Polulatiry Explosion
Web traffic measurement company ComScore, this month, said Facebook has seen its membership rocket since opening up to all users. It said the site grew 89% to 27 million unique visitors in the US in May. ComScore also said Facebook users are spending, on average, 35% longer on the site and viewed 143% more pages than a year ago. It’s worth noting that these figures do not cover the latest surge in Facebook usage since May. Still, this data is what will be generating the most interest in the offices of advertising agencies and marketing executives across the country.

They are also being viewed closely at the Los Angeles offices of MySpace, which this month hit back at media claims that it’s losing popularity to its rival. In a bullish press release, headlined “MySpace outperforms all other social networking sites”, it quoted ComScore and Forrester data, showing it had more than 70 million US users in June – nearly one in four Americans – and is used more regularly than any other social networking site. MySpace executives were not just trying to counter the media hype of Facebook, but their owner Murdoch, who paid $580m (£288m) for MySpace two years ago. In an interview with the Wall Street Journal last month, he was reported to have quipped about MySpace’s target audience, “They’re all going to Facebook at the moment.”

The question is, what is all this user data really worth, especially to the marketers and advertisers, who are bound to have something to do with Facebook’s revenue streams?

True Worth?
Reports have suggested that Facebook will do between $100m to $150m (£50m to £75m) in revenue this year, with profit around the $30m (£15m) mark. Most of the revenue currently comes from an advertising partnership with Microsoft. But it’s the potential of the user data that is really exciting – for example, the ComScore data showed that Facebook’s use has grown 181% with the 25to 34-year-old demographic and 98% with users aged 35-plus. Add to that the existing college-based core users and you can see why some analysts are saying it has more potential for higher-revenue marketing, based around better user information, than any other site.

Pali Capital’s Richard Greenfield, one of Wall Street’s more outspoken media industry analysts, said as much in a note to investors this month, titled Facebook: Why Every Media Company Should Buy It Now – The Power of Influence. “We believe social networking has the power to enable content creators… to better understand their target consumers and… create content that has a greater likelihood of success.”

The latest speculation around Facebook’s future suggests Microsoft is willing to spend $6bn (£3bn) for Facebook, but that the three-year old start-up wants somewhere between $8bn and $10bn (£4bn to £5bn). The numbers and valuation multiples are mind-boggling, but after YouTube’s $1.65bn (£820m) acquisition by Google, Silicon Valley watchers believe all things are possible.

The numbers also make Yahoo!’s rumoured $1bn (£500m) offer sound paltry, and its indecision on upping that bid might have contributed to former chief executive Terry Semel’s departure in June. Despite all this, one of Facebook’s main-venture capital backers Accel Partners reportedly says it sees no rush to sell, according to coverage of the iMeme Fortune conference in San Francisco last week by financial newspaper Barron’s.

Of course, the other option for Facebook is to take the initial public-offering route. Some commentators say as much as media companies and technology businesses alike want to have a piece of Facebook, an IPO might be the best route if they can sit tight and keep building the company. The two start-ups these analysts point to as examples are eBay and Google.

If Facebook lives up to even half the hype, it is bound to reap a big reward, say most watchers. As Greenfield says, “Assuming Facebook’s growth trajectory continues as we expect, the knowledge that could be harvested from controlling the Facebook platform would appear to be the most valuable data in the history of the media world… Why shouldn’t every media company want that?”

Yinka Adegoke is a New York-based business journalist. us.column@gmail.com


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