Saturday, January 19, 2008

Quick Note On The "Facebook Is Worth $15bn" Talk

It is always an interesting time when most seem to read headlines and become instant experts and that a lot of investment decisions are made out of fear of someone else getting it.

So, lets play this out....

Headline: Microsoft Invested $254m In Facebook For A 1.6% Stake Valuing The Company At $15bn

The actual story here is that Microsoft bought the right to sell advertising for Facebook in the US and abroad. This is the same model that MySpace and Google employed when crafting their relationship. Google paid MySpace $900 for 3 years. Microsoft now has rights until 2011.

Microsoft now has a guaranteed inventory of Facebook advertising to sell to their advertisers. Which in itself was a defensive move against Google doing the same thing... which would have boosted their share price and given them more purchasing power and access to the brains that are going to Facebook for options.

So, to set it straight - the $240m paid was primarily for the advertising rights and the equity stake was a "part" of the deal.

Now, the reality:

Everyone is betting and valuing Facebook on becoming something one day. They are on betting on technologists trying to figure out ways to advertise to people. They are NOT making money today. Ask people why they think Facebook is worth so much and they say because everyone is signing up. Yeah, people used to go to Excite and use Netscape a lot too.

Also, buyer beware. The people in the background releasing these figures are the venture capitalists who are talking up the value for their own gain. The commentators and journalists reporting it have mostly never held corporate positions nor had extensive business experience but for some reason they are seen as authorities on what business will look like in the future.

How it will go down:

A lot of the time, these companies are hyped and hyped without having to deliver the revenue to justify their valuation. Then they hire a very savvy investment bank to hold well co-ordinated conversations with larger media and tech companies all with the intention of convincing potential buyers that there biggest competitor is about to close on the deal:

This will be Facebook's pitch to Viacom:
"Now listen, you dont want another "MySpace Situation". News, Comcast, Disney and Microsoft are coming hard but I can hold them for a minute. But we need to hit this $20bn figure and as part of the merger, Zuckerberg wants a President role. Which in net terms is only going to cost you about $14bn because your share price will spike $6bn on the news we could leak tomorrow - these journo's will print anything and Wall Street is so emotional that they will be all scared they are going to miss out.

Now please.. this is on you. You saw what happened to Tom Freston when he lost the MySpace deal to Rupert. I want to do this deal with you so you can be remembered as the man who did it Philip. Lets make you part of history - this could be your legacy... and the title of your book when you leave this place."



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