We all giggled when Microsoft's investment in Facebook back in late 2007 gave the social networking site a valuation of $15 billion. Well, most of us did, anyway.
At the same time, I see great value in Facebook. Much of that value is wrapped up in how much of the typical Facebooker's life is intertwined with the social network. But I think there's tremendous advertising value, too. Apparently, founder Mark Zuckerberg doesn't think there's a future in monetizing Facebook in the same way as Google, but I do. Back in October, he said "I don't think social networks can be monetized in the same way that search did."
As a Facebook user, I see a lot of value in Facebook Ads. Those are the targeted ads on the right side of the pages that are based on profile information. Since many of my interests are stated in my profile, I tend to get a lot of Facebook ads that have more of an impact on me than, say, a run-of-site skyscraper that appears out of the blue.
I think there's a lot of potential in Facebook Ads. As a matter of fact, I think Facebook's best shot at getting to that $15 billion valuation would have to involve scaling Facebook Ads up, such that they operated on a similar scale to Google's AdWords.
See if you can follow my math.
First of all, let's assume that in order to get to the $15 billion valuation, we're using a 5X multiple. (Yes, I know, it's just a stake in the ground. Bear with me.) So getting to $15 billion would involve revenue of around $3 billion a year.
Right now, Facebook doesn't have a lot coming in, in terms of scalable ad revenue that it can count on. Maybe it will pull in around $20 million worth of virtual gift sales revenue. Here's a link to an analysis from last year that put virtual gift revenue at around $15 million -- so I'm being a bit generous. It's a drop in the bucket, insofar as getting to $3 billion a year in revenue.
Another drop in the bucket is the few tens of millions it might get from selling a few dozen big packages to big advertisers trying to make a splash on Facebook.
Let's be generous and give Facebook $150 million in ad revenue for the year. That would encompass existing Facebook Ads sales, anything brought in by outsourced banner sales, virtual gift revenue, and packages sold to larger brand advertisers. We're still a far cry from the $3 billion needed to justify the $15 billion valuation.
What gets Facebook there, though? Personally, I think they need to turn Facebook Ads into the next Google AdSense.
It's an old number, but I've seen a published report that states that Google makes around 12 cents for every search. If we use that number as a guideline, let's see where we would net out with some basic math.
According to Facebook's own Facebook Ads interface, which I checked just a couple minutes ago, Facebook has the potential to reach 50 million U.S. profiles corresponding to people age 13 and older. Assuming each of those profiles visited Facebook an average of five times a month (probably conservative given the several-times-daily usage I'm used to seeing), that's at least 250 million opportunities to serve a targeted ad every month.
I say "at least" because I'm counting visits here, not page views. If we factor in three page views per visit, which isn't an invalid assumption assuming that most visitors check the main feed and their profile at least once before bailing, that's 750 million opportunities to see an ad every month.
Assuming that for each of the 750 million opportunities to see, Facebook has a targeted ad for the user. And pricing that out at the 12 cents per search Google number, we come up with $90 million a month in ad revenue, or more than a billion dollars a year in ad revenue. OK, so it's not $3 billion. But keep in mind, I have completely ignored non-U.S. traffic, and I've used conservative estimates here. Use a higher number of page views per visitor and that revenue number could easily triple.
I think that for Facebook to have its best shot at increasing actual market value, it needs to invest in Facebook Ads and promote the program to small businesses and individuals. Get people as familiar with Facebook Ads as they are with Adwords. Inventing a new product like Facebook Gifts isn't going to cut it. An existing self-serve ad solution that can scale might actually get Facebook to that magic number.