How can Facebook be worth $15 billion?

Tom Hespos
Social Media Posted on February 19, 2009

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."

Why not?

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.

Tom Hespos is the president of Underscore Marketing and blogs at Hespos.com.

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Comments

Jean-Paul Andrivet
Jean-Paul Andrivet February 23, 2009 at 7:07 PM

Hi Tom,

I understand your point. You are right to say that the ads will be extremely well targeted and this is a big difference with google. Let's see what they come up with.
I personally think that sooner or later, Facebook will not be free anymore or at least not 100% free. Having premium membership is a good alternative that may work. For instance Linkedin does it right. Once you become indispensable you can ask for a fee. For that, you need to be the best and that's what facebook is (at least now). Now, will it be worth 15B? let's see! ;-)

scott broomfield
scott broomfield February 19, 2009 at 5:03 PM

Its not! A ton yes! $15B, no way.

David Lozovsky
David Lozovsky February 19, 2009 at 11:29 AM

I think that your idea is not entirely off base, however using that $.12 per search revenue number, or in this case per view using the facebook model is aggressive.

Is the 12 cent number associated to searches on google? Most likely, that being said, they certainly dont earn the same revenue on adwords which is more of a push (showing the ads to users based on the content) as opposed to pull(users telling you exactly the info they want, i.e. asking for specific information on a search engine). So if we discount the revenue per view of adwords to half that (which in my mind is too high) we end up with 6 cents.

Now take the 6 cents number and figure it would take a decade to get the several hundred thousand advertisers google has, and decide that FB would most likely just syndicate a feed from google, yahoo, or msn which results in an unspecified revenue share maybe netting them between 1 and 3 cents.

Years ago, I saw the unquantifiable opportunity(unique value) presented with FB was by impressing certain brands on their huge 14-25 year old user base prior to their joining the work force and becoming buyers, thereby creating a generation of nike and american apparel and sony, and...... buyers.

The opportunity is there but no one has yet figured it out.

how will they do it?????? Aye there's the rub.....

Tom Hespos
Tom Hespos February 19, 2009 at 8:33 AM

Hey Jean-paul:

Perhaps the 12 cents/search thing isn't directly translatable, but I needed a starting point. Where I will push back on your comments is on the notion that the sensitivity to Google's ads is necessarily higher. Facebook has something that Google doesn't - rich profile information. This can make their ads as relevant as Google's, if not more so. The Facebook ads I receive are like content to me, not like advertising - mainly because they're targeted to me based on my profile data and thus they're always relevant. Kind of like the ads in a niche interest magazine tend to be seen as content.

Get my drift?

Jean-Paul Andrivet
Jean-Paul Andrivet February 19, 2009 at 4:54 AM

Hi Tom,

At least it's a good start. My doubt here is that 12 cents / search may not apply to Facebook.
I think the fundamental difference between Facebook and Google is that the sensitivity to Adverts in Google is much higher. why? Well because they are searching. Simply that. On facebook, the main interest is to see what your friends are doing etc ... and this is a big difference because you just won't pay attention to the ads which translates in low CTR.

I think Facebook will have diffcult times to justify its value, at least financially because you may find other ways to create indirect value like political influence (i.e political use of social network to influence power or to take the power), indirect benefits for the population, tool for national emergency etc ...

Anyway thanks a lot for your contribution, the debate is open.