While The World debates over when Facebook will go Public and what its Worth would be, Mark Zuckerberg is Worried about a Decision he has to make – Sell-off his 24% Stake & Bid adieu to Facebook or alter The Very Business Model by Diversifying. What should He Choose?
How much is Facebook worth? Actually, the 26 year-old founder & CEO of Facebook – Mark Zuckerberg, doesn’t care. He publicly claims so. In fact, he proved it when he outplayed a clever Wolf’s bait (Michael Wolf, the-then President of Viacom’s MTV Networks) in the fall of 2005. The 19 month-old Facebook, was then, only famous in American circles. To befriend Zuckerberg, Wolf proposed a jet ride from San Francisco to Westchester (NY). During the five hour-long flight, Wolf postulated that Zuckerberg should consider selling a stake in Facebook to Viacom. That was around 10 pm on a cold December night of 2005.
The following month, Wolf flew to Palo Alto, to propose a stake purchase to Zuckerberg. He declined. Another month, another attempt; only this time, Wolf had no Power Point ready and underwent a more delicate experience. He got to visit the youngster’s one-room untidy apartment. The outcome however remained unchanged – Zuckerberg yet again declined Wolf’s $1.5 billion offer for a 100% stake in Facebook. That was 3 pm on a February afternoon of 2006.
Many thought that the Harvard drop-out had then caught the wrong end of the fishing line. He hadn’t. Today, Zuckerberg is the youngest self-made billionaire on the planet, worth $4 billion and owns 24% stake in a much bigger Facebook, with a user base of over 580 million (it crossed the 500 million mark in April last). Better still, his social networking machine is now cash-flow positive and after making $700 million in revenues in 2009, is forecasted to touch $2 billion this year. It also has plans to go public sometime between late 2011 & early 2012. So will the market consider this intangible web property worth billions of tangible green bills?
Over the years, Zuckerberg has accepted some overtures that have certified the market values of his brainchild. In March 2008, when Microsoft signed a contract that included a 1.6% stake buy in Facebook for $240 million, it put the value at $15 billion. The $4 billion current valuation of Zuckerberg’s stake also puts Facebook’s market value at a close $16.7 billion. There are also experts that are optimistic about a post-IPO Facebook. Rick Sturm, CEO of New York-based Enterprise Management Associates (EMA), tells B&E, “The Mcap of Facebook is likely to be around $34 billion.” We have our doubts.
Even if we assume Facebook to be the next big wave after Google, its value (considering the ratio of Google’s Mcap of $27 billion on Listing day and its revenues the previous year) comes to only $11 billion – exactly what US-based Next Up Research’s independent forecast and Felix Investments’ $25 per share offer value it at. There is also a great similarity between the two online companies in case of revenue streams, which gets us to expect a Google-like market reaction to Facebook’s IPO. [When it went public, Google was earning 99.97% of its revenues from ads, almost equal to Facebook’s 100% today.] There is however a small hitch – six years back, the market was bullish and investors were willing to dole out billions without much of a thought. Today, the sentiments are more “cautious”. Also, Facebook’s user base of above 580 million does not imply the same number of “unique” visitors. There is bound to be some double count, which weakens Facebook’s case (which was not the case with Google’s model when it went public in 2004). In short, the Mcap could fall short of $11 billion. Says Massachusetts-based Analyst Richard Louis to B&E, “The market value of Facebook is unclear. At this time, it is just an alternative site to post information. Over the years, its value will fall if it doesn’t diversify.”
So will Facebook become a fad? Louis says it already is: “Facebook is already a fad. I don’t think it is going to grow out of that.” Pessimism apart, the giant’s credit notes being reduced to scribbled sheets appear quite a possibility. And the market has proven to be a fickle group; Facebook cannot overlook this truth. Speaking to B&E from California, Jeremiah Owyang, Partner, Altimeter Group says, “Facebook is at risk. Other social networks became complacent, got sold to larger media entities, or failed to invigorate their talent tools and suffered as a result.”
Debate is also on that Facebook could become larger than Google. Speaking to B&E from Chicago, Andrew Lipsman, Senior Director of research agency comScore Inc., sounds optimistic. He says, “Facebook can eventually becoming the largest web property in the world (currently it is #4). But this would still take a few years. To get there, it would need to get traction in some of the larger Internet markets where it still has a limited presence, such as Japan, S. Korea, Russia & Brazil.” But Sturm doubts it. Says he, “It is unlikely that Facebook will become bigger than Google. It is riding the wave of popular infatuation. Things can go wrong for Facebook. What if some hacker found a way to compromise its security? There are many possibilities!” Facebook also has to move away from relying only on online ads. While Facebook is growing, so is Google. Not content with being the dominant search engine, Google continues to attempt to mean more things to more people. Its latest innovation is Google RealTime. In short, cautious, but deliberate diversification will benefit Facebook, as Owyang of Altimeter says, “Facebook will need two strategies to maintain leadership: Innovate & integrate features at all consumer touchpoints, so it’s no longer just a destination strategy.” This typically implies that Facebook has to look beyond social-networking communities.
The following month, Wolf flew to Palo Alto, to propose a stake purchase to Zuckerberg. He declined. Another month, another attempt; only this time, Wolf had no Power Point ready and underwent a more delicate experience. He got to visit the youngster’s one-room untidy apartment. The outcome however remained unchanged – Zuckerberg yet again declined Wolf’s $1.5 billion offer for a 100% stake in Facebook. That was 3 pm on a February afternoon of 2006.
Many thought that the Harvard drop-out had then caught the wrong end of the fishing line. He hadn’t. Today, Zuckerberg is the youngest self-made billionaire on the planet, worth $4 billion and owns 24% stake in a much bigger Facebook, with a user base of over 580 million (it crossed the 500 million mark in April last). Better still, his social networking machine is now cash-flow positive and after making $700 million in revenues in 2009, is forecasted to touch $2 billion this year. It also has plans to go public sometime between late 2011 & early 2012. So will the market consider this intangible web property worth billions of tangible green bills?
Over the years, Zuckerberg has accepted some overtures that have certified the market values of his brainchild. In March 2008, when Microsoft signed a contract that included a 1.6% stake buy in Facebook for $240 million, it put the value at $15 billion. The $4 billion current valuation of Zuckerberg’s stake also puts Facebook’s market value at a close $16.7 billion. There are also experts that are optimistic about a post-IPO Facebook. Rick Sturm, CEO of New York-based Enterprise Management Associates (EMA), tells B&E, “The Mcap of Facebook is likely to be around $34 billion.” We have our doubts.
Even if we assume Facebook to be the next big wave after Google, its value (considering the ratio of Google’s Mcap of $27 billion on Listing day and its revenues the previous year) comes to only $11 billion – exactly what US-based Next Up Research’s independent forecast and Felix Investments’ $25 per share offer value it at. There is also a great similarity between the two online companies in case of revenue streams, which gets us to expect a Google-like market reaction to Facebook’s IPO. [When it went public, Google was earning 99.97% of its revenues from ads, almost equal to Facebook’s 100% today.] There is however a small hitch – six years back, the market was bullish and investors were willing to dole out billions without much of a thought. Today, the sentiments are more “cautious”. Also, Facebook’s user base of above 580 million does not imply the same number of “unique” visitors. There is bound to be some double count, which weakens Facebook’s case (which was not the case with Google’s model when it went public in 2004). In short, the Mcap could fall short of $11 billion. Says Massachusetts-based Analyst Richard Louis to B&E, “The market value of Facebook is unclear. At this time, it is just an alternative site to post information. Over the years, its value will fall if it doesn’t diversify.”
So will Facebook become a fad? Louis says it already is: “Facebook is already a fad. I don’t think it is going to grow out of that.” Pessimism apart, the giant’s credit notes being reduced to scribbled sheets appear quite a possibility. And the market has proven to be a fickle group; Facebook cannot overlook this truth. Speaking to B&E from California, Jeremiah Owyang, Partner, Altimeter Group says, “Facebook is at risk. Other social networks became complacent, got sold to larger media entities, or failed to invigorate their talent tools and suffered as a result.”
Debate is also on that Facebook could become larger than Google. Speaking to B&E from Chicago, Andrew Lipsman, Senior Director of research agency comScore Inc., sounds optimistic. He says, “Facebook can eventually becoming the largest web property in the world (currently it is #4). But this would still take a few years. To get there, it would need to get traction in some of the larger Internet markets where it still has a limited presence, such as Japan, S. Korea, Russia & Brazil.” But Sturm doubts it. Says he, “It is unlikely that Facebook will become bigger than Google. It is riding the wave of popular infatuation. Things can go wrong for Facebook. What if some hacker found a way to compromise its security? There are many possibilities!” Facebook also has to move away from relying only on online ads. While Facebook is growing, so is Google. Not content with being the dominant search engine, Google continues to attempt to mean more things to more people. Its latest innovation is Google RealTime. In short, cautious, but deliberate diversification will benefit Facebook, as Owyang of Altimeter says, “Facebook will need two strategies to maintain leadership: Innovate & integrate features at all consumer touchpoints, so it’s no longer just a destination strategy.” This typically implies that Facebook has to look beyond social-networking communities.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting
