The Social Media Monopoly

Interesting article on Wired today - 5 Thinks That Could Topple Facebook's Empire. It's fun and easy to create this lists - 5 things that..., 10 things that... - but thought-provoking nonetheless.

Terms on a patent are 20 years, but businesses of the Facebook sort are difficult to make patentable, let alone enforce any legal restrictions on design or usability. (Ask Apple how that went with Microsoft a few years back.)

This effect shrinks the window of opportunity for a company like Facebook to capitalize on their monopoly and create an infallible social network medium. But, infallibility is more of a quixotic notion that one borne in reality. Technology companies with enormous market and mind share are constantly getting nipped in the heels by direct competitors or emerging niche players in the very same industries that the Facebook-like companies helped to create - Skype with other VoIP providers or eBay with UBid, ePier, atOncer... Heck, even Facebook took over the social media space created by previous players like MySpace (remember them?).

Facebook has been around a while and still emits a feeling that it's still in start-up stage. Monopoly power is a good thing - that's what drives entrepreneurs to create new products and services because of the clear profit motive. Would be a shame if they missed their profit opportunity but waiting too long to capitalize.

Friendfeed, Facebook (& Google?)

Just saw that Facebook is acquiring FriendFeed. Found this interesting since the Google tree is expanding. Paul Buchheit is one of FriendFeed's founders and the brains behind Gmail. After watching him speak on a panel last Spring, I wrote about Google, employee retention, and entrepreneurship.

FriendFeed is a small shop with only 12 employees according the TechCrunch article. Reminds me a bit on how Yahoo! intergrates new applications through acquisition instead of through internal innovation. Will be interesting to see the financial disclosure on the deal (if ever). Friendfeed was initially funded with $5 million by Benchmark Capital and its own founders.

Some questions pop to mind:

With the "normal" successful exit for VCs at 10x or more, did they get $50 mln for the deal? If so, did Facebook overpay as Yahoo! has been doing? Wonder if they saw an opening to exit for a few bucks less citing lower chances for long-term success and took it to focus on the next venture?

And speaking of Yahoo! and innovation, Steve Rubel has an interesting thought - make FriendFeed the new "Facebook Labs." Why not? Seems the right people are in the place...

Google Profiles

Yep, there's lots and lots of places for an online profile, but I just set up my "Google Profile" and found it really easy and kind of fun. One aspect that I like is that Google Profiles aren't explicitly related to other applications such as the case with LinkedIn or Twitter. It's basically a simple landing page for you to show a little about yourself publicly then link to your contact info and other online places.

And given that it's hosted by Google, I'm sure that there's some SEO placement should someone be searching for you.

Here's my profile:
http://www.google.com/profiles/scottsambucci

Facebook Terms of Service

Logged into my Facebook account this morning to see:

Over the past few days, we have received a lot of feedback about the new terms we posted two weeks ago. Because of this response, we have decided to return to our previous Terms of Use while we resolve the issues that people have raised. For more information, visit the Facebook Blog.

The changes from earlier this month had users worried that Facebook would use their information after canceling an account with them.

I give them credit - they do listen to their users. Though, it would seem that they should try to listen to users before implementing policies like this so they don't appear to be backtracking all the time.

Update: Project Einstein now "His Catalog"

Back in the Spring, I met the guys at Project Einstein at the University of San Francisco Business Plan Competition. They are on the move!

They are now His Catalog. Check 'em out for the holidays! Great to see new companies with solid concepts continue to grow. I like their blog as well - lots of interesting articles and tips.

If you want to follow these guys in the social media world:

Twitter: @hiscatalog
Facebook: His Catalog by Project Einstein

Happy shopping!

Revisting Twitterer vs Googler User Valuations

Last week, I wrote did some quick math comparing the value of Twitterers relative to the value of Googlers. My initial thoughts were that Googlers were far more valuable - that the relative value of Twitterers based on the $500 mln offer from Facebook was an extreme valuation. Now I'm not completely sure.

After posting the article, I was playing on my Twitter feed and found a particularly good patch of tweets and posts by Twitterers I'm following. I'm fairly persnickity about who I follow - if I don't find the tweets useful from a business or personal interest standpoint, I'm quick to cut the cord and "unfollow" someone on Twitter.

During this run of interesting Twitter posts, I got to thinking how I was using Twitter as a personal scouting network for information I find useful and interesting - others are sifting through the morass of information throughout the web to pull out relevant content that they find interesting and useful, and in turn, are posting so that other like-minded people can benefit. I do the same for those following me on Twitter. Felt awfully efficient.

Then, I saw a tweet from @Jim Duncan

"Wondering if Twitter could be more useful than Google"

And this morning, I read Nick Bilton's article on O'Reilly Media - "The Twitter Gold Mine & Beating Google to the Semantic Web."

I'm not vain enough to think that I was the first to consider that Twitter could be valued on par or above that of Google, but there was a certain comfort in seeing others were thinking the same way. I'm still not sure what the structure of my thoughts are on this issue and how Twitter would supercede Google from a user valuation standpoint. Even Twitter hasn't publicly announced a revenue model for itselt, but there's something here...

"No Thanks!" in 140 Characters or less

Maybe the message was something like:

Twitter: @Facebook "No can do. Thx 4 the offer."

It's common knowledge now that Twitter declined Facebook's "$500 million" offer. Running some numbers yields some interesting results on the offer and valuations of both companies. (We'll come back to the quotes around the $500 million shortly...)

Back in April, Michael Arrington wrote that Twitter was worth between $60-$150 million just before it closed it’s $15 million venture round at the end of May.

TwitDir shows that there are “3,328,420 twitterers we know!” as of the time of this article. Using the $500 million offered by Facebook for Twitter and some simple math, this would equate to a valuation of approximately $150 per twitterer. Not sure if I’m buying that (pun intended….).

Henry Blodget did some interesting analysis on the real value of the Facebook offer, since the $500 million is “overvalued Facebook stock” based on the $15 billion valuation. There are lots of ways to slice and dice Facebook's valuation (including my own perspective based on the "Facebook Multiplier"). Blodget estimates that Facebook’s correct valuation is closer to $5 billion, thus decreasing the real value of Facebook’s offer down to $150 million, or $45 per twitterer.

At $45 per twitterer, which is probably a more realistic number to use, two questions:

1. How would Facebook earn back the $45 per twitterer in future value terms?
2. What does Twitter have planned that makes them think they can do better than $150 million.

Just my opinion, but:

1. I'd guess that Facebook isn't quite sure what it'd do - sort of feels like Yahoo! in a way. Good on eyeballs and users, not so good with the whole revenue thing.
2. Twitter isn't so sure either, but knows that there's a better deal out there than $500 million in monopoly money. Just because they turned down this deal doesn't mean they turn down the same amount or less from another enterprise.

Reviewing LinkedIn's Valuation

After writing my weekend post about LinkedIn’s $1 bln valuation ("Locked in on Linked In"), I did a bit of reading about how some others viewed the matter. (I wanted to come to my own conclusion without being influenced too much by others who already wrote about the topic…)

Michael Arrington wrote a nice article back in June about social network valuations, using the “average Internet advertising spend per person in the country they live in.” Arrington mentions the same problem I alluded to in my article – not too many data points from which to base valuations in the social networking industry (Facebook’s at $15 billion, MySpace at $580 mln and Bebo at $850 mln by acquisition). He doesn’t come to any conclusions as far as viability of the current valuations, but the metrics and his responses to commentary make for an interesting read.

Many postings announcing the $53 mln Bain Capital investment mention rumors of how LinkedIn was striving for a $1 bln valuation, seemingly to justify its targeted user base of higher-than-average income user base that can be used to generate higher-than-average advertising revenue. Caroline McCarthy mentioned this back in May on CNET, as did Arrington in his May 5 posting.

Overall, the initial reaction out there is that the validity of the valuation remains to be seen, but the unique nature of LinkedIn’s user network appears to have some merit according to the first wave of observers. Of course, there were those with a hearty defense of the Facebook valuation when it hit $15 bln last year as Jonathan Richards wrote about in October.

Locking in on LinkedIn

I read about the recent $53 mln Bain Capital investment to LinkedIn and I was prepared to write an article again questioning the valuation of another social/business networking site. Like many, I'm not particularly enamoured with the current $15 billion valuation of Facebook, so my initial reaction to the $1.035 billion valuation of LinkedIn was - "here we go again..."

Because LinkedIn is a private company, their financials and revenue sources aren't available. I did some scouting on the site and they make money in a few ways:

1. Advertising via their Large Budget and LinkedIn Direct Ads to provide targeted advertising to its members.
2. Subscriptions to Premium Services that allow the user to directly contact people out of their network with "InMail" and send "Requests for Introduction" emails. These services range from $20-$200/month.
3. Perhaps some others such as data analytics based on membership statistics and activity (though this is only my conjecture...).

Johnathan Richards wrote an article following the June 2008 venture investment and estimates LinkIn revenues to be around $80-100 million, with "about a quarter" of the revenues coming from subscription services. At first, I was a bit surprised to read that subscription fees could be so high, until I considered the number of recruiters that have contacted me via LinkedIn, as well as my own activity. (I personally subscribed to their $20/month plan when searching for a job a while back, and was able to link up with a great recruiter at Russell Stephens as a direct result of an InMail.)

With the current $1 billion valuation based on revenues of $100 mln, that's 10x revenue valuation, without any knowledge of their profit margins. The News Corp acquisition of MySpace for $580 million back in 2005 supplies some relativity to the $1 bln valution. Though a social site, not a business site, MySpace does parallel LinkedIn in terms of its ability to focus on a large market segment, it's networking component, and the fact that the business world has placed a valuation on it. Since the acquisition, MySpace has reportedly been a boon to the New Corp's Fox Interactive Media Group. (According to the most recent 8K report from June 2008, News Corp reports that Fox Interactive Media grew revenues 57% and increased "operating profits five-fold on strength of advertising and search revenue growth at MySpace.") Two years after the aquisition, things seem to be looking rosy for New Corp according Murdoch in this Wired Magazine article.

Considering the virtual aspect to LinkedIn's product and the scalability of subscription services, I suspect that their profit margins are healthy and growing as LinkedIn acheives a greater lock-in effect with users - becoming the main destination site for business networking. The caveat to acheiving this lock-in effect will be the quality of service and networking effects. However, by providing the ability to remove connections and requiring a subscription for the ability to directly contacts individuals outside of one's network, LinkedIn drastically removes the diluation and spam factor to their networking functions. Additionally, LinkedIn boasts (as they should) that their audience has an average household income of $109,000, about 2.5x's the median US household income of $48,200 according to the 2007 US Census (though I'd like to know the median LinkedIn income to see how much top executives on LinkedIn skews this average figure).

Looking LinkedIn's development, they've taken a deliberate and apparently successful approach so far - develop a user base, find a way to quickly monetize activity with premium subscription services, and then analyze the user base to leverage it for targeted advertisers. From this perspective, LinkedIn is now completing the foundation of its business with the Series A, B, C financing of about $30 mln, while this most recent $53 mln should be intended to move the company into a mature state with specific long-term goals for continued rapid growth.

The most compelling part of LinkedIn's situation is its $1 bln valuation based on $100 mln in revenue. It's high, but justifiable given the apparent success of others in the networking space, and the unique niche of its business and professional membership base. Like everyone, I'm interested to see how quickly it can convert the valuation to practice, or to see if it can utilize its valuation to grow by:

1. Acquisition of higher-end job sites such as TheLadders.com or Vault.com
2. Targeted content partnerships such as their recent NY Times agreement
3. Integration of specific industry content and membership groups such as BAFT, VCExperts, or others to serve as a clearinghouse of industry information for its users.

So here I am at the article's end, completely reversing my initial reaction to the valuation - seems to be okay after all...

Google's Employee Retention & Entrepreneurship

About a year ago, I explored Google’s investment per employee during their growth phase, noting that the Google’s employee retention might suffer in the long term as a result of simple mathematics. As Google continues to grow its revenue and employee numbers, maintaining the investment rate per employee to pay for its innovation and development would become increasingly more difficult.

As is well-known, Google inherently breeds entrepreneurialism by allowing its employees to spend 20% of their time on self-developed projects. Projects are presented to Google's product councils for further internal funding and support. Once the “true entrepreneurs" (which I am defining in this case as individuals that would actually leave their corporate binds to strike out on their own) learn the skills necessary to develop and incubate a new innovation, it is a natural progression to expect that they will move on to work on their own.

The brightest minds that have been with Google since the early days have little monetary incentive to stay now that their share options have vested. Those that came aboard Google after their successful IPO and subsequent share price growth have even less upside to sticking around in the near term. Why give up self-developed intellectual property to the “mothership” when you can add the Google brand name to your resume, retain ownership of your idea for a few years, and pursue your own interests afterward. This raises an interesting management question – is it possible that current Google employees are sand-bagging? Could they be working on only a part of their own ideas while working with Google, but saving their very best for a planned departure in the near future?

Adam Lashinsky’s article a recent issue of Fortune Magazine – “Where Does Google Go Next?” – examines the departure of key personnel at Google leaving to create their own start-ups. Some of the individuals and examples that Lashinky cites are Paul Buchheit who co-founded of FriendFeed (with three other former Googlers), Yanda Erlich who founded Mogad, and Nathan Stoll who founded Mechanical Zoo (with other ex-Google engineers). Which of these companies (if any) and their core ideas where actually developed during employment at Google?

The natural metamorphosis of many start-ups is to create a product model legitimized through a rapidly growing user base (and sometimes even paying customers!), and then an exit via acquisition to a larger firm seeking new technologies and products not otherwise developed in-house – companies like Yahoo! and, of course, Google.

Following this line of thinking, Google’s growth creates a reduced incentive system for the true entrepreneurs, but the corporate culture formalizes their employees’ entrepreneurship skills and strengthens their ability to develop and build their own businesses. During this employment period, the true entrepreneurs may sandbag on their ideas, then leave to start their own technology companies that conceivably end up as an eventual acquisition target for Google and its competitors.

This presents an interesting moral hazard for Google. While they deliberately strive to hire people with a penchant for entrepreneurialism, they may not know which employees are “true entrepreneurs” and which simply have an entrepreneurial spirit willing to share their best ideas with Google. This places even more emphasis on the recruiting and hiring process to vet out which applicants are entrepreneurial, but are not necessarily true entrepreneurs.

While each of these thoughts require additional analysis and research, Lashinsky’s article and listening to Paul Buchheit at a recent SVASE Panel Speaker event got me thinking about the Google-employee incentive relationship. More to come on this idea....

"I've got the conch!" - What now for Facebook?

Jessi Hempel’s article in the most recent edition of Fortune Magazine – “Finding Cracks in Facebook” - intends to uncover some new foundational flows with Facebook. The article itself doesn’t necessarily reveal any new revelations about Facebook, but further asserts some of the ongoing concerns that those in the technology arena have long had about Facebook (an inexperienced CEO, an emerging firm without a clear revenue growth model, and an extreme market valuation).

As I wrote several months ago, Facebook’s economic value may vastly different from its business and market value. While the company is bringing several new experienced executives on board, I can’t help but imagine that Facebook corporate headquarters at least mildly reflects the tensions in the Lord of the Flies.

While Yahoo!, once an Internet powerhouse, slowly fades into oblivion as a Microsoft acquisition target and under talk of selling off company assets, it would be imprudent to consider Facebook’s market share and daily visitors as validation that the company has assured a long-term future for itself.

The latest scoop has Microsoft considering an acquisition of Facebook themselves - another story unto itself.

In looking at the lack of revenue growth and ongoing struggles with launching new platforms and working with developers, the technology development and appeal of Facebooks seems to be reaching an entropic stage. Perhaps this would be a good time to cash out and start anew with the next idea that is inevitably rolling through the minds of Zuckerman and his cohorts. I only wish I had such decisions to consider in my our career and the opportunites available to him should be nearly boundless.

Is Yahoo! acquiring assets or problems?

Over the last couple of years, Yahoo! has been on a perpetual shopping spree in recent years – acquiring social media and social networking companies to boost its status in the Web 2.0 world.

18 months ago, a Business Week article by Catherine Holahan – “Yahoo’s Strategy: Growth By Acquisition” – supported Yahoo’s strategy, promoting the relatively low cost of these acquisitions. In 2006 for example, Yahoo! acquired Del.icio.us for about $20 million. Smaller acquisitions of maturing start-ups put Yahoo! in the position of a late-stage venture capitalist – pick a portfolio of seemingly good bets and expect that a couple of them will pop. Not a bad idea if you're flush with cash and need some new products.

That was then, this is now. More recent acquisitions are well above venture capital money - Blue Lithium for $300 mln, Zimbra for $350 mln, Maven Networks for $150 mln, and Right Media for $680 mln. As I wrote in a previous article, it seems that Yahoo! gave up cash for a goodwill asset on the balance sheet. More importantly, Yahoo! appears to have become a quilt of media companies, Web 2.0 technologies, and social networking tools that hardly generate revenue.

Back in January on TheDeal.com, David Shabelman suggested that Yahoo! consider more acquisitions - possibly of Monster.com, Expedia, and Shutterfly (among others). At some point, Yahoo! seems almost addicted to acquisitions as if the next one will be their saving grace or missing piece to the puzzle.

Shabelman also suggested that Yahoo! might combine Right Media and BlueLithium and spin out the combined company as an IPO. To break even on the acquisition costs of these two companies, the IPO proceeds would have to exceed $1 billion. To provide some perspective, Vision China’s (VSIN) IPO hit the market at about $544 mln in late 2007 and Digital Domain (DTWO) is scheduled to hit the market at $72-84 mln. This isn’t exactly a thriving IPO market for technology companies.

Corporate finance maneuvers of acquisitions, spin-offs, and juggling won't save the future of Yahoo! I have more thoughts on this, especially when compared to Google’s ability to grow its business more organically through innovation and development. Stay tuned for more….

Yahoo!'s Valuation - Goodwill leads to Goodwill

Recent word is that Microsoft has no plans to raise its $44.6 billion bid for Yahoo! Inc. $44.6 billion got me wondering how this matched up to Yahoo's value based on its balance sheet. I found one item to be particularly interesting - "goodwill" - which seems to be indicative of Yahoo! Inc.'s problems, and could be leading the company to Goodwill Industries very soon. How about a new logo?

As defined on Investopedia - "goodwill appears on the balance sheet of the acquirer in the amount by which the purchase price exceeds the net tangible assets of the acquired company." In other words, goodwill is the extra that you pay for after accounting for the actual company assets.

Keep in mind that I don't know what the media industry norms are with regard to the goodwill-to-acquisition price ratios, but looking at the Yahoo! Inc.'s 2007 Annual Report, it seems to me that they're pretty good at throwing cash into the goodwill bucket for acquisitions without getting much of a tangible return.

A few examples from Yahoo! Inc.'s 2007 10-K to illustrate (this info is found around page 70-85 of the report...):

1. Purchase of SOFTBANK, a firm with which Yahoo! had a couple of joint ventures (2005)

Total purchase price = $500 million in cash
Amount of purchase price allocated to Goodwill = $388 million

2. Purchase of Right Media (2007):

Price = $526 million ($246 in cash, $237 in equity)
Amount of purchase price allocated to Goodwill = $440 million

3. Purchase of Zimbra (2007):

Price = $302 million ($290 in cash)
Amount of purchase price allocated to Goodwill = $241 million

4. Purchase of Blue Lithium (2007):

Price = $255 million ($245 in cash)
Amount of purchase price allocated to Goodwill = $221 million

5. Alibaba (2005):

Price of 46% of shares = $1 billion in cash
Amount of purchase price allocated to Goodwill in 2007 = $443 million

Like I said, I don't know what the normal allocation to goodwill as a percentage of total purchase prices in the media business, but when I look at these transactions, I see a significant trend -

Yahoo! likes to take cash from its pockets and exchange it for an accounting asset called "goodwill" that you can't touch or see. These investments are not all-inclusive of all of the deals on Yahoo! Inc.'s books, but just up the cash spent on these five examples and you get nearly $2.3 billion.

I'd like to think that the brain trust at Yahoo! Inc. would like to have that $2.3 billion to spend on projects developed internally to produce organic company and product growth. Perhaps these actions are a microcosm of what's happened to the Yahoo! brand. A company that led the Web 1.0 revolution is now becoming a sideline watcher in the Web 2.0 and Web 3.0 evolution.

To put some perspective Microsoft's $44 billion offer - Yahoo! generated $6.9 billion in revenue in 2007, putting Microsoft's offer at a bit more than 6x revenues. Compare that to Microsoft's valuation of Facebook at $15 billion, estimated to be 500x revenues.

New Social Network - "Were You There?"

I met Jonathan Hull, founder of "Were You There?" at a recent SVASE event. I just set up a membership and started playing around.

"Were You There?" bases its social networks on events, times, and places. Couple of examples - there are groups around the Kennedy assassination, Elvis Presley, and Venice, Italy.

Cool stuff. Definitely worth checking out for an interesting perspective on developing a new social network.

The Facebook Multiplier: Economic vs. Market Valuation

I get the social part of it. I just found a friend of mine from high school, spent 10 minutes with my wife perusing pictures to put on my profile, and even reviewed 20 results for “Sambucci” including two in London, one in Glasgow, and one in Ecuador. I don’t get the 100x revenues to determine its $15 billion valuation.

Facebook’s foray into tracking member purchases went awry. Advertising dollars reach their ceiling quickly unless you’re Google.

The Facebook marketplace is less than overwhelming. There are 2598 items for sale in Silicon Valley, CA at the time of this posting. When I click “For Sale", the first page results include a 5"x5" cheese cake for $50, Oracle SQL/DBA Training for $360, and a 2007 Hybrid Ford Escape 4WD for $26,000.

Huh?

A marketplace is a place of aggregation where economic activity transpires. On the Internet, eBay is the typical example - an established marketplace with buyers and sellers. Defining the market more loosely, the same occurs when someone uses Google or another search engine to find a product that they eventually purchase. Members join Facebook for social networking, not to directly engage in economic activity.

With no indications that Facebook’s revenues are rising exponentially, it’s likely that direct revenues Facebook will generate for itself will remain relatively low compared to the true online marketplaces like eBay (~ $7 bln in 2007) and Google (~$15+ bln in 2007).

If this is indeed true, they why use Facebook’s revenues as the metric for valuing the company (currently at 100x revenues according to Microsoft’s recent investment)? Maybe there’s a more accurate way…

Let’s assume that because I’m a Facebook member, I meet up with a long lost high school friend in New York City and have dinner. It’s fair to assume that this happens frequently with many Facebook members – connecting with friends either directly or in part because of Facebook – which results in economic activity of some sort taking place (a $100 dinner in this case).

By taking this approach, we can then begin to connect a certain amount of economic activity attributable to Facebook. Some members are “power” users and others are more cursory like me. But overall, there is likely some average amount of economic activity per member that can be measured. Economists use “mulipliers” to calculate these “down line effects” of some event or activity. (In fact, the consumption multiplier is the rationale for the recent tax cuts approved by Congress and President Bush.)

If we can quantify these economic activities per Facebook member, then why not use a “Facebook Multiplier” to determine the firm’s value? This multiplier is not related to the revenues of Facebook. Instead, the newly-created revenues of other market participants as a result of Facebook existing become the determining factor to establish Facebook’s economic value to the market. Using the multiplier establishes a true intrinsic value for the firm, not an arbitrary market value as was done with Microsoft’s investment in Facebook.

This proposed multiplier may indeed show that Facebook’s firm value is indeed 100x revenues, but not because we use Facebook’s revenues as a basis for arriving at the valuation. Instead, Facebook is valued based on its contribution of total economic activity. This multiplier can be justified going forward because of the lock-in effect of Facebook, and possibly the growth of the multiplier as Facebook members utilize Facebook more frequently.

This creates a clear divide between Facebook’s economic value (its contribution to the economy as a whole) and its shareholder value (market value). To the displeasure to future Facebook shareholders, the multiplier approach values Facebook on the total revenues that it creates in the general economic, not revenues that it collects as a participant in the market.

The result? Facebook’s economic value is different than its market value. In fact, its economic value is greater than its market value. We assume that shareholders value a firm based on future earnings due to them as a part owner of the company. Shareholders that purchase shares of Facebook based on the market valuation of $15 billion established by Microsoft will be sorely disappointed if the firm’s personal revenue growth of Facebook remains at its current level.

In the end, I’m not contesting that Facebook is worth $15 billion. It could be even more than that. I just disagree that Facebook’s market value is $15 billion. The firm may hold an economic value of $15 billion with the resulting multiplier effect, with the market value falling far short of this number.

(Also consider that perhaps Microsoft established a $15 billion market valuation for Facebook to artificially inflate the market price to other would-be suitors…)

Caveat emptor.