For the past six years, I’ve spent nearly every day talking about Facebook. From the early days when MySpace was the enemy, to today when all those problems seem so far away, Facebook has blown past even its supporters’ expectations. This May, it is poised to be the most valuable IPO in Internet history.
It seems clear that Facebook is on the path to success. Launching into the public world at a rumored $100 billion dollar valuation raises several questions. Is this value justified today or only on a forward-looking valuation? If the latter, how do investors profit as growth and valuations meet normalized levels? What are the revenue paths ahead for the world’s social superpower?
To me, there is one simple concept that justifies Facebook’s current valuation, understandable given both current market dynamics and forward-looking prognoses. The concept is this: Facebook has earned the right to compete against the other superpowers (Google, Microsoft, Apple) and has a strong opportunity to win if they hammer execution. This is not a right to be taken lightly: It’s an opportunity that comes around only once or twice in a decade.
According to Facebook's S-1, revenues in 2011 were $3.7 billion. On a price/sales basis, Facebook’s valuation is projected at 27x trailing revenues--a big number with big expectations. LinkedIn is trading at around 20x. Google, with a value of $210 billion, has market cap that’s just over twice Facebook’s, but its price/sales number is 5.6x trailing revenue. Is Facebook’s revenue five times more valuable than Google’s? Or six times more valuable than Apple’s? Or 12 times more valuable than IBM’s?
With their large, powerful base of 850+ million users, what could be next for them in terms of monetizing this opportunity?
Direct Display Advertising
Advertising has traditionally been Facebook’s primary source of revenue, showing continued year-over-year growth from local, national, and global advertising partners. Facebook saw display dollars increase from $764 million in 2009 to $3.154 billion in 2011. In 2012, Facebook released its next generation of ad products that combine both the content and advertising of a marketer. Designed to drive messages across the social graph, these products offer increased performance through social context. Marketers are still experimenting with these new products, and their long-term revenue impact is not yet known.
Facebook is well positioned to continue with strong revenue growth from direct display advertising, presuming ratios between user growth, daily log-ins, and page views stay positive. There will be a point when these level off, eventually--when everyone is on Facebook. Long-term growth will likely require Facebook to focus on advertising products that target consumers lower in the decision cycle and offer more disruptive video products that offer higher price points to advertisers.
As consumers shift to mobile, making money from this platform is also critical to long-term success. Facebook is likely to continue to push the boundaries of traditional ad products and launch new opportunities for advertisers to reach and connect with consumers. The challenge here is that new products, however exciting, often have longer adoption cycles given their requirements for change in a market where most dollars are expended in traditional, same-old, ad-buying practices.
According to eMarketer, search marketing is expected to be a $30 billion dollar industry globally by 2016. Currently, Facebook captures almost no revenue from search, outside of a partnership and revenue-share with Microsoft’s Bing platform, which is not specifically mentioned in Facebook's S-1 filing. If you ever tried to hunt for something on Facebook, you are unlikely to see search as a core product ready for revenue growth.
Last week, it was widely rumored that Facebook was making moves into search, led by ex-Google engineers including Lars Rasmussen. Facebook is unlikely to catch up to the advanced algorithms that made Google famous around the world. However, they likely don’t need to in order to win.
Facebook has a powerful network of 850+ million users and can bring social context to search in a way that Google cannot. Expect to see a social search launch within the next year, driving a big revenue opportunity. From knowing which product(s) your friends like, to knowing where you’ve eaten in local markets, Facebook has a goldmine of data that can bring a whole new experience to finding and discovering products online and offline.
I’m bullish on Facebook’s long-term opportunity to win search. They have a strong leadership team with experience in search. Partnered with Zuckerberg, the social visionary, it's all backed up by an amazing amount of data. If anyone in the world has the opportunity to reinvent search, it is Facebook.
With regulators staring down the barrel on “cookies” that track users on the web, it’s a great time to be Facebook (even though they have privacy issues of their own). With hundreds of millions of users logged on at any given moment, Facebook has a powerful opportunity to help publishers better target their advertising across the web.
This could be accomplished by setting up an ad network powered by Facebook’s data to capitalize on the intelligence of connections into the Facebook social graph across the web. Backed by a new generation of ad products, this innovation could mean real change brought to traditional digital marketing and ad network business.
This could be a nearer-term play as Facebook builds on ad-serving technologies for its own site. It offers the opportunity to quickly scale revenue without the larger data and user complications of search. It also offsets risks associated with daily log-ins and sustained page traffic.
Facebook currently generates $557 million from third-party app developers that use it as a payment platform for their social games. As the whopping majority of this comes from Zynga (i.e. almost everything), Facebook obviously has a vested interest that its users keep planting gardens and hunting zombies. Two issues remain around this revenue source: sustainability and opportunities for expansion.
Social gaming is big business today, but what will tomorrow look like? With a highly competitive ecosystem of gaming partners and platforms hunting for big titles, gaming mimics Hollywood, where big studios make big bets on big titles. As a public company, Facebook will have heightened expectations of success with titles on their platform and the dollars that pass through them.
There is plenty of room for growth with Facebook’s payment platform, which could lead to it reaping 30% of pass-through revenue, in areas like gaming, casinos, virtual goods, music, app sales, and movies.
There is also a wider opportunity for Facebook to own the mobile wallet, covering everything from clothing to taxicabs. Success would take a whole new approach, lower merchant fees, and connection into an existing payment processing network.
Success will also require Facebook to avoid blindness as it heads into Apple’s laser beam, as Apple carries a strong hold in other forms of online gaming and content distribution. Crazier things have happened, and Facebook has a powerful base to capitalize on.
LinkedIn proved a new and powerful business hypothesis that social networking users are prepared to pay for premium functions. Can Facebook, with its wider audience and long legacy of free services, prove a similar use case? It is clear that LinkedIn has an advantage. Business users have expense accounts, which always makes sales easier. A publicly traded Facebook cannot ignore the fact that in 2011, LinkedIn generated over $105 million in annualized revenue from such products.
What could Facebook sell to drive subscription revenue? Here’s a quick list (prefaced with the disclaimer that I don’t think all of these are good business ideas). While such opportunities could net enhanced revenue, it is unlikely that Facebook will pick up on these notions anytime soon, given their previous statements and corporate sentiment about charging consumers.
- Premium access to an ad-free environment
- Dating-like functionality
- Business functionality (leads, contacts, etc.)
- Paid features (enhanced video, photo storage, etc.)
- Premium applications
- Charge brands/companies an annual page fee
Facebook has accomplished something few have: the right to compete for global dominance in the digital landscape. Although their valuation is clearly forward-looking, there is an opportunity for Facebook to develop revenue channels that allow it to deliver on this valuation. The ups, downs, and marketing timing that surround all this are yet to be seen. But nothing can set the value of a company like living in the market.
Michael Scissons is the president and CEO of Syncapse, a corporation he founded in 2007. Syncapse is the leading full-service social technology company that helps the world’s largest advertisers build, manage, and measure their connections with consumers in the digital landscape.
[Image: Flickr user Jesse Kessenich]